How lenders can use data to get ahead in the economic downturn

How lenders can use data to get ahead in the economic downturn

It’s a difficult time to run a small business. Owners are being squeezed from both sides. Rising inflation has made simply operating a company more expensive, and revenues are declining as consumers cut back on spending amid the cost of living crisis.

The challenging macroeconomic environment has led to an increasing number of SMBs seeking support to manage working capital pressures. A recent study from Codat found that over 21 million businesses (65%) in America will try to access credit over the next twelve months. 

This presents a significant opportunity for lenders. But with the added opportunity comes added risk. Unfortunately, many SMBs will not survive this downturn, increasing the likelihood of loan defaults. 

Codat’s Head of Brand and Communications, Gabby MacSweeney, was recently joined by Elliot Avison, CEO of Dancerace and Ed Sherrington, Codat’s Head of Product Development, to discuss actionable ways lenders can better safeguard against the risk of default in an economic downturn.

Check out the highlights from that conversation below, or watch the full community session on-demand here.

The crucial role of data and technology in safeguarding against risk

When considering the role of data in reducing the probability of default, there are three key factors to consider:

1. Timelines: Are you making decisions based on the latest data available, and how often are you reviewing that data? 

In turbulent, less predictable climates, the economic position of a business can change in the blink of an eye. That’s why ensuring your decisions are based on the most up-to-date information is so important. 

It’s also really important to be proactive about reviewing that data, even after your initial decision”, explains Ed Sherrington. “By monitoring your borrower’s performance in near real-time, you can apply really targeted mitigations against default. That could be anything from calling for early repayment, terminating a loan where you have disbursements yet to pay out, or just offering assistance”.

2. Detail: What can you glean from a very granular view of a business’s activity?

With more customer data available than ever, lenders can drill down into very specific indicators of risk. Traditional ratio analysis is a great starting point, but looking at overdraft utilization in specific accounts or payroll lines to identify signs of redundancy can also help you paint a more detailed picture of a business. 

According to Ed, the benefits are not just limited to the specific data points lenders can now pull, but also extend to the more granular inputs that can be used to power predictive models and machine learning techniques to ultimately reduce risk.

3. Accuracy: How can you be confident that the data you’re using is a true and accurate reflection of what is actually happening?

Accounting data is rich and contextual but is user-entered, and, therefore, potentially open to manipulation and fraud. Banking data lacks context and meaning, but comes directly from a trusted source or a third party, and is immutable. 

Cross-referencing accounting data against bank accounts and transactions is a highly effective way of uncovering accidental or fraudulent misrepresentation. 

Taking on the financial advisor role

In a recent report by Accenture, industry analysts identify a real opportunity for lenders that are able to “collect information once and use it repeatedly.”

Elliot Avison, CEO of Dancerace, echoes this sentiment, pointing to the lender’s ability to use the data to proactively offer relevant products and services at the precise time and place of need.  

Both lenders and borrowers stand to benefit from this. With a more holistic understanding of their customers, lenders can become trusted financial advisors, supporting businesses to overcome challenging economic conditions. For lenders, these deeper insights allow them to identify more cross-sell and upsell opportunities.

“ I think that the additional value that can be brought will create stickier customers but also expand the market because a lot of businesses don’t necessarily know what products they’re looking for,” explains Elliot.

Shifting focus from raising revenue to reducing costs

In today’s economic climate, many credit providers are switching approaches. They are no longer relying on top-line growth to drive revenue. Instead, they are seeking impactful ways to cut costs. 

One of the most effective ways to do this is to introduce process automation to drive efficiency during onboarding, underwriting, and ongoing monitoring. Doing so not only helps to significantly reduce the direct costs associated with collecting, processing, and evaluating application data but the management of borrower relationships and maintaining existing accounts on an ongoing basis.

In the clip below, Ed Sherrington explains what this could look like in practice.

Want to learn more? Watch the full community session on-demand here.

A decrease in processing and application time also has the added benefit of allowing lenders to process more applications in the same amount of time. This essentially means lenders can increase revenue without increasing costs.

Again, the benefits of introducing operational efficiencies into the onboarding and underwriting process are not limited to lenders.

In a recent study conducted by Codat, we found that of the US small businesses that didn’t access credit in 2022, 20% found the application process too complicated, 14% said it took too long to get the money, and 15% said the application (origination) costs were too high. By introducing process automation, lenders can simplify applications, speed up capital deployment, pass on cost savings to customers, and ultimately increase their loan book. 

In a nutshell

The current economic environment presents a significant opportunity for lenders that are able to successfully meet the growing need for capital among SMBs without increasing risk. 

To ride this wave of opportunity, lenders will need to ensure access to detailed, accurate, and real-time borrower data. With this data to hand, lenders will be able to introduce process automation to reduce operating costs and even develop deeper, sticker customer relationships by acting as informed financial advisors.

How Codat can help

Codat offers a suite of features designed to help lenders build faster, higher-quality underwriting using enhanced data and real-time insights from customers’ accounting, ERP, eCommerce, payments, Point-of-Sale, subscription platforms, and more. This includes:

  • Optimized data collection: Small businesses can share their data in a few clicks, and you can receive it in a standardized format wherever you need.
  • Financial ratios and sales analysis: A fast route from raw data to the key financial ratios you need to make decisions for a wide range of small business credit products.
  • Enhanced cash flow: Transactions are automatically categorized with a machine learning model trained on hundreds of thousands of associated accounting and banking small business datasets. 
  • Enhanced financials: Management accounts are predictively mapped to a universal and standard chart of accounts.

To learn more about our platform and solutions, get in touch with a member of our team using the form below—or sign up for a free account, to try them out for yourself.