Closing The B2B Trade Credit Gap With AI, Machine Learning

Although the COVID era continues to have an outsized impact on small businesses, frontline lending experts say SMBs have recently begun to catch a break when it comes to getting loans through FinTechs and other non-bank lenders. Ken So, founder and CEO of Flowcast, told PYMNTS that today’s $3 trillion worldwide SMB “credit gap” is narrowing because the criteria to secure loans are changing, and increasingly, embracing alternative data sources.

“For example, some [FinTechs] have lowered their minimum FICO score from 650 to 600 — or even going down to 575,” he said.

At the same time, some lenders have also scaled back the minimum time a company needs to have been in business from at least two years to as little as 12 months.

“We’re seeing [some lenders] getting more and more aggressive despite COVID,” So said. “In contrast, the big banks have gone in the other direction.”

He said this easing of credit has only emerged in the past month, but its timing couldn’t be better given the dichotomy he sees between big companies that are doing well and small, young companies (as well as certain industries) that are often left struggling with cash flow.

“Retail, real estate, travel, hospitality and manufacturing — those are what we’re seeing that are impacted and are in need of having a cash-flow infusion in order for them to stay afloat,” So said.

As a result, he’s seen average cash balances shrink 50 percent from pre-COVID levels to fewer than 15 days now. “So, there’s this higher demand for working capital to fulfill the cash-flow needs along that whole supply chain,” So said.

Narrowing The Gap

According to So, 75 percent of small businesses worldwide are effectively rejected by banks even though he estimates one-third of them would actually qualify and be fundable based on their creditworthiness.

To address this problem, Flowcast has just launched its Tillful platform, which it says will level the playing field for SMEs by helping them boost credit scores needed to qualify for loans.

“The [SMB] market is underserved and highly fragmented and still does not have easy access to capital from the traditional lenders,” So said. He added that unlike consumer credit — where all the credit agencies use standard FICO scoring — FinTech lenders tend to craft their own their own methodologies.

AI/ML Game Changer

What’s changing to make credit easier to obtain is that FinTechs are using machine learning and artificial intelligence to extract information so that lenders can make data-based loan decisions, according to So.

He said that Tillful automates a traditionally manual process that has historically been extremely slow and costly, so more SMEs can get the money they desperately need while banks can generate new business.

So said that in a traditional screening process, SMEs “would send PDFs of bank statements or PDFs or their audited or unaudited financials, and banks [would] take weeks to underwrite. And the cost of underwriting a large borrower vs. a small SME was virtually the same.”

By automating 100 percent of that decision-making process, that drives the cost of underwriting down and allows banks to finance SMEs in a much more direct way, So said.

He said that’s because traditional underwriting’s impact often ends up being not so much about the risk that lenders are taking on, “it’s really around the underwriting cost and the origination costs that it requires for the bank.” So said a new credit-scoring method that automates decision-making can change that.

Information Asymmetry

Another problem keeping SMEs from getting the financing they need is what So calls “information asymmetry.” The asymmetry rests on would-be borrowers’ lack of understanding about the borrowing process, the types of loans and terms available, how and where to begin and a presumption that they’re going to get denied.

But So said Flowcast believes it can level the playing field by “arming these business owners with a fair, transparent set of information about what lenders are looking for … we can help them build up their credit profile in order for the banks to make their lending decision.”

With such information in hand, SMEs’ odds of success at securing loans go up — and the credit gap can go down.