ATLANTA — The competition for small business customers is heating up among lenders. A symbiotic relationship exists with these two groups, as both need each other to grow. Small businesses require monies for equipment, working capital, product development and to hire more sales people, while lenders seek to expand their addressable and decisionable market. When lenders incorporate B2B trade credit insights into their credit risk assessment processes, both groups win. LexisNexis® Risk Solutions, a data and analytics company, known by the lender community for providing robust and diverse sets of data coupled with analytics, enables lenders to see creditworthy small and micro businesses sooner. To that end, LexisNexis Risk Solutions recently announced it will incorporate business-to-business trade credit data from Cortera into its small business risk assessment products.
In LexisNexis Risk Solutions “Ask the Small Business Experts” series, Ben Cutler, the company’s head of Small Business Risk Management, sat down with Jim Swift, CEO, Cortera, to discuss the state of B2B credit data today. Below is an excerpt from that conversation.
Ben Cutler, LexisNexis Risk Solutions: Our customers who lend to small businesses continue to ask us for more and more data that widens the aperture through which they view credit risk. Share with us more about B2B trade credit.
Jim Swift, Cortera: Insight from B2B trade credit relationships, or trade payment performance history, provides lenders with information on how small businesses interact with their suppliers in terms of their purchase and payment behavior. Rather than credit supplied by a financial institution, such as a bank, B2B trade credit is provided by trade partners that invoice their customers and get paid on terms such as “net 30 days”.
B2B trade credit data is gathered when a trade partner reports on performance about a small business account from invoices. This describes how much a small business owes and whether the payment is overdue. Moreover, in comparison to credit from a bank, such as a credit card bill, small businesses often have many more trade credit relationships with their suppliers than bank relationships. This gives lenders a much deeper insight into small business purchases and payment histories, and therefore a more informed sense of its credit-worthiness.
This is particularly useful for industries where B2B trade credit is more common, including manufacturing materials, building supplies, transportation carriers, logistics, food and beverages, equipment leasing, medical and laboratory supplies, industrial equipment and supplies, apparel and outdoors, and service industry supplies.
Cutler: This is powerful data. Tell us why it is crucial today for lenders making credit decisions.
Swift: I think there is a massive demand for financing options for small businesses. I have worked with many small companies throughout my career, so I have seen this firsthand. One financing option might be bank relationships, another might be venture capital-based relationships. These are well-explored areas. But trade credit relationships are how the vast majority of small businesses actually finance their companies. So, we set out to create a robust view of what these businesses are buying and how they are paying their suppliers. If you structure the data the right way, something that we’ve spent a great deal of time perfecting at Cortera, the lender will have a fuller picture of what makes the small business tick and will be able to properly evaluate it. That way, lenders and small businesses benefit.
Lenders have been very conservative because they haven't had adequate data to help them make predictive decisions that are accurate enough for them to evaluate small businesses. As a result, if you really needed capital as a small business, especially if you haven't been around for very long, then you have often been forced to go out and sell equity in your company. When you’re a small business, you don’t want to give up equity in your company, as that is a precious commodity.
Cortera is using business-to-business trade credit to help lenders and small businesses create a frictionless system. You have a ton of demand from small businesses seeking access to capital, and you have lenders who want to lend money, but in a smart way. That means they need better data. And with that better data, you’ll have more SMBs included in the financial system, even those with thin-file credit histories.
Cutler: How will the new alliance between Cortera and LexisNexis Risk Solutions help small businesses and lenders in the marketplace?
Swift: There are two main areas in which the addition of Cortera data to LexisNexis Risk Solutions products will make a great difference: lenders will now have richer analytics and tools for new customer acquisition, and lenders also will have improved risk monitoring that goes beyond the credit decision. Having B2B trade credit data is a crucial tool used in predicting the likelihood that an account will become delinquent or charged off. For a lender, you can’t wait until an SMB pays you back slowly before you start to set off risk alerts. If you do that, it will be too late. The tools must be in place to know which of your clients have the highest risk, based on leading, not lagging, indicators.
Historically, most lenders have put all small businesses into one risk category. Lenders simply have not had enough information to appropriately evaluate small businesses, which are notorious for having thin credit files. However, small businesses are not homogeneous and the credit decisioning process must reflect that. Combining Cortera data with LexisNexis Risk Solutions data will lead to more meaningful risk segmentation.
While LexisNexis Risk Solutions already offers SBFE Data™ to its customers, Cortera data integration into these products rounds out small business credit profiles, adds a new dimension of insight and creates additional coverage beyond current industry viewpoints all of which work together to minimize lender risks. Cortera data fills a gap and is a must-have for lenders. We’re seeing the demand for small business financing tools rise exponentially, and the demand for alternative lending data is surging as well.
Cutler: What differentiates Cortera?
Swift: We really focus on structuring the data, so that lenders can see the interaction intelligence by type of supplier. We organize our information to show several years of spend across 45 different supplier categories. For example, our data can show how a manufacturer’s spending on raw materials is trending over time, providing insight into their size and growth, and how consistently they are paying those key providers, which is a sign of stability.
Small business owners are conscientious, they are smart, they are courageous, they are risk takers, but most of all, they are loyal. Lenders want to include them as customers, but must be sure that they are including the right businesses. Structuring the data into these categories, which detail industry-specific purchases and industry-specific payments, creates the most accurate predictive models. Underwriting is now a competitive differentiator for lenders. Therefore, lenders who use B2B data, particularly when combined with other forms of alternative data, as we have here with Cortera and LexisNexis Risk Solutions, will have a leg up on the competition.
Cutler: Thank you Jim. By joining forces, lenders now have access to the “triple crown” of data: LexisNexis Risk Solutions small business alternative data, SBFE Data, and Cortera trade credit data. This “triple crown” enables lenders to expand their markets without adding in additional risk, while ensuring more small and micro businesses are included in the financial system, which will impact long-term economic growth for our country.
Contact Ben Cutler to learn how you can access LexisNexis Risk Solutions suite of small business tools, including small business credit scores, small business credit reports, and small business monitoring tools. Ben.firstname.lastname@example.org
About LexisNexis Risk Solutions
LexisNexis Risk Solutions harnesses the power of data and advanced analytics to provide insights that help businesses and governmental entities reduce risk and improve decisions to benefit people around the globe. We provide data and technology solutions for a wide range of industries including insurance, financial services, healthcare and government. Headquartered in metro Atlanta, Georgia, we have offices throughout the world and are part of RELX Group (LSE: REL/NYSE: RELX), a global provider of information and analytics for professional and business customers across industries. RELX is a FTSE 100 company and is based in London. For more information, please visit www.risk.lexisnexis.com and www.relx.com.