Small and Medium Enterprises (SMEs) are the backbone of the Indian economy, contributing significantly to employment and GDP growth of the country. Despite their significant contribution, SMEs often face difficulties in raising funds from traditional sources. This has led to a rise in alternative lending, leading to the prominence of alternative data.
Alternative data is a term used to describe non-traditional data sources, to assess creditworthiness. Traditional data sources such as credit scores, income statements, and bank statements have limitations when it comes to evaluating SMEs. Some of the sources of alternative data are shared below:
- Social media
- Online reviews
- Digital footprint
- Credit card transactions
- Website analytics
- POS transactions
- Mobile app analytics
These are now being used to supplement traditional data and provide a more comprehensive view of SME creditworthiness, a much-required parameter for lending capital in non-traditional ways.
Significance for small businesses
Small businesses with limited financial histories will need alternative data to back upon for raising funds. For example, a business that has only been in operation for a year may not have a credit score making it difficult for traditional lenders to assess its creditworthiness. In such cases, most traditional lenders will deny the application in its formative stage, whereas if the SME supports the documents with alternative data, there is a high probability of assessing the business on parameters more than one. This not only creates a fair field for businesses to raise capital but also opens up funding opportunities for one and all.
Alternative data can provide insights into the below parameters to provide a holistic view of a business’s financial health:
- Business’s revenue streams and cash flow
- Customer sentiment
- Management’s vision
- Customer review
- Customer engagement
- Brand stickiness
- Brand reputation
- Sales performance
Such intangible parameters help lenders make informed decisions by determining the business’s potential for growth and its ability to repay loans.
Identification of fraudulent activities
Another benefit of alternative data is the identification of fraudulent activities. Such activities are a significant concern for lenders, especially in the SME lending space. Alternative data can be used to identify suspicious patterns, such as irregular transaction activities, high-risk business activities, and deceitful reviews. This information can be used to detect and prevent fraud, protecting lenders and borrowers alike.
Personalised lending experience
Alternative data is also used to provide a more personalised lending experience for SMEs. Traditional lenders often rely on the standard underwriting processes, which may not take into account the unique characteristics of each business, more so in the current scenario where businesses are as dynamic as customers’ requirements. Alternative data can be used to tailor lending products to the specific needs of SMEs, providing more flexible and customised lending solutions. For example, alternative data can be used to identify businesses with seasonal fluctuations in revenue, allowing lenders to offer flexible repayment terms to accommodate these fluctuations.
Lenders even offer different forms of capital to fit different business needs. Some forms of equity-free capital are given below:
- Revenue-based Financing
- Fixed Term Loan
- Inventory Financing
- Working Capital Demand Loan
The way forward
The use of alternative data is still in its early stages in India, but it is quickly gaining traction. Fintech startups are leading the way in alternative lending, leveraging alternative data to provide SMEs with faster and more accessible financing solutions. These startups are disrupting the traditional lending ecosystem by providing much-needed financing options to SMEs.
Debt portfolio monitoring is a critical aspect of managing a lending business. Lenders need to track the performance of their loan portfolio to identify potential risks and take corrective actions to minimise losses. One way to improve debt portfolio monitoring is by leveraging alternative data sources.
We at GetVantage usually say:
“Live data is the new collateral”
Our Alt Data Monitoring suite and Early Warning Signal Platform enable lenders to improve portfolio monitoring and take timely preventive measures to reduce the risk of NPAs. This helps us not only ensure timely repayments from the businesses but also enables us to power the growth of the businesses aggressively with equity-free capital.