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Using the right data to make the right decisions when lending to SMEs

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Small to medium-sized enterprises (SMEs) make a significant contribution to economic growth. Extending credit to SMEs on the right terms can widen the net of financial inclusion and build thriving economies. We consider three sources of data—bureau data, principal data and alternative data—that can help business-to-business (B2B) lenders make better-informed decisions on the credit risk of SMEs, and create opportunities for them to thrive.


Thriving SMEs grow stronger economies

We have around 2.2 million SMEs in South Africa contributing to 14% of our total employment rate and 21% of our gross domestic product (GDP)

In any economy, small to medium-sized enterprises (SMEs) have a significant role to play: not only do they contribute to economic growth but they also provide numerous job opportunities that help combat increasing unemployment rates. In a country like South Africa, a thriving SME sector can play a vital role in upping employment and growth rates, which is why helping these businesses succeed is critical.

One way of empowering SMEs to thrive is to widen the net of financial inclusion by extending credit to small business so they have access to funding when they need it, and on terms that don’t stand in the way of their growth. So far, business-to-business (B2B) lending doesn’t favour SMEs. But with access to data sources that enable better-informed risk assessments, this could all change—and deliver promising results.


Extending credit to widen the net of financial inclusion

Currently, 40% to 60% of small businesses in South Africa do not have access to credit, compared with 27% of SMEs in developed economies.

On the surface, there seem to be good reasons for this state of affairs: SMEs have a high failure rate in the first few years of operating, so they’re seen as a risky market for credit.  And, while traditional credit bureau data on consumers is regulated and freely available, information on the payment profiles, defaults and judgments for businesses is not. This data is therefore inconsistent across bureaus, making it difficult for businesses to assess the credit risk of SMEs.

But that doesn’t mean there’s no useful information out there. There are three data sources available to B2B lenders that can help them access this market without increasing their exposure to risk: bureau data, principal data, and alternative data. Here’s how each can be useful ...


Data sources for assessing the credit risk of SMEs

Bureau data

In the world of B2B lending, using bureau data has been the norm for some time. The most common bureau data available on businesses are trade references and bank codes.

These are useful sources of information on the SME’s spending behaviour and ability to repay debt. Other ‘traditional’ bureau data includes information from the registrar, principal details, adverse information, and financial and operations information (where available).


Principal data

There is a high correlation between the way you run your personal finances and how you manage the finances of your business. Determining a business owner’s risk is therefore an important step in assessing the related risk of the business applying for credit.


Alternative data

Data that can indicate a business’s asset value, market risk, financial behaviour and ownership risk will enable a more informed credit decisioning process that benefits both the SME and the lender. With businesses having a greater digital presence, alternative data is becoming available in large volumes. Online payment behaviour, mobile behaviour, social media, collateral registers and property registers can point to various aspects of risk decisioning.


Extending credit to SMEs on terms that help, not hinder, their growth is vital to establishing a business culture in which SMEs flourish. Lenders that are able to use all information available to them and interrogate alternative data to uncover new insights will not only improve their own risk outlook; they’ll also create the opportunities for SMEs to be part of a thriving financial ecosystem.