The evolution of commercial lending: Real-time and data-powered?

Telephone → Fax Machine→ Email → Open Data

Historically, SME lending has been based on historic static information. For example, when a small business applies for a loan the data obtained by the lender is at that moment in time and backed up by filed accounts (which can be 11 months out of date and for companies under the audit threshold, extremely slimmed down, see figure 1).

In the past the black hole left by the lack of available data has been filled by the relationship businesses would have with their local bank manager or broker. As SME lending moves online and away from a relationship based lending approach a more innovative and scientific approach is being adopted by forward-thinking lenders.

Example of latest filed accounts for an SME turning over £2m YoY.
Is greater financial transparency changing everything?

Through regulatory pressure around Open Banking (PSD2) and innovation in relation to accounting platform integrations lenders can now access real-time financial performance data on their borrowers on an ongoing basis.

Access to such data gives lenders a much more in-depth view of the businesses they’re working with. The benefit to both parties involved goes beyond the man-hours saved by eradicating the manual retrieval and provision of financial data.

With the free flow of detailed line item data on a frequent basis (at times daily) lenders are able to perform a revolving risk assessment. So as the company performs more favourably from a financial performance perspective the lender is able to make contact and pre-empt the need for additional funding to facilitate their growth. Keeping well incentivised deal-happy commercial finance brokers at bay.

In a similar way, the convenience of contactless payments has meant consumers are willing to pay more for a cashless and quick payment solution. High performing small businesses prioritise speed to capital over rates charged by the lender

Will small businesses allow lenders to access open banking and accounting data?

In short, they already are and if value is offered in return.

Small businesses already share intimate management accounts with lenders on the understanding this data is used purely for underwriting purposes. Nothing has changed here, just the method used to retrieve this data has been modernised.

As is the case with all modern technology clear communication is the key to adoption. Adoption is likely if an SME is clearly informed that they can get much-needed capital into their account quicker if as a lender you’re able to regularly access key financial data in an automated fashion.

Open banking data is everything?

In a similar way, you would require rich contextual accounting data when assessing the viability of an investment in Debenhams PLC and not rely solely on their cash balance, which was £42.7m as per their audited financial statements as at 1st of September 2018.

Early adopters to live data lending were also early adopters of open banking (partly due to regulation acting in their favour and partly due to the technology available). Such lenders quickly learnt that this data is far from being the be all and end all of a small business’s performance.

The immutable data obtained via open banking is useful but lacks context. Essentially, it is still a six field list of debits and credits and is anti-accrual.

The accrual concept was introduced as a method that records revenues and expenses when they are incurred, regardless of when cash is exchanged, in order to give a more accurate picture of a business’s performance.