Credit Risk Management: Why a New Approach is Necessary

Updated: Nov 17, 2019

Credit risk management is not one of the most important things a lender looks at when deciding to offer a business loan. In actuality, it is the only thing. It is the one crucial element that enables correct assessment of the loan’s feasibility. Yet, in today’s complex and everchanging economy, banks are revising and adjusting their approach to credit risk. In fact, with technology bringing forth unique capabilities, all lenders must follow suit. The financial crisis of 2008 forced banks to act with caution, specifically in regards to small business lending. This means that even today, as many as 50% of small and medium sized businesses, are turned away when seeking funding from banks. Luckily, alternative lenders these days, have more options and even advantages when assessing the risk of business loans.

Banks have many obstacles when it comes to analyzing credit risk management. So much so, that it makes sense that many don’t offer loans to small and even medium businesses. As it takes a great amount of effort, most banks are just not interested in loaning relatively small amounts. For example, some have a threshold amount (about 100,000) for loans. Other banks will not even consider giving a loan to a business that has less than 2 million in revenue. Similarly, insufficient credit histories are an insurmountable problem for a bank to overcome. Also, the issue of underwriting is a problem when small loans are considered. The setbacks are due to outdated bureaucratic procedures, which are lengthy and sometimes overwhelming. Consequently, these loans are just not considered worth the effort, not to mention the risk.

Inevitable Changes in the Field

While the banks are reluctant to take a meaningful part in small business loan sector, a demand for funding remains. If small and medium sized companies make up 90% of the market, it means only 10% have available funding. This leaves many growing companies searching for other means, beyond putting their personal savings on the line. Enter alternative lenders, a breath of fresh air to a field that has been dominated by banks for many years. Alternative lenders are unburdened by the procedural entanglements of the banks. In fact, they can make up their own rules, as well as surpass the usual lending hurdles.

The key to this change, as in most spheres in modern life, is technological advances. Digital progress lets an alternative lender have access to a loan applicant’s data quickly. Furthermore, outdated face to face meetings are unnecessary. An alternative lender can have all the necessary information within a very short timeframe. Even better, credit risk analysis is much simpler with this new technology. In fact, even a company without good credit history can prove it is capable of returning a loan, by other means. Fintech is revolutionizing how loans are given, both in how quickly they are given and in how flexible they are.

Analyzing Credit Risk Loans for Ecommerce Business

In the meantime, Fintech alternative lending is changing the lending game. In fact, it is slowly becoming the leading edge of the financial world. As a consequence, banks are taking notice and starting to come around to the realization that this new model of credit risk analysis is the future of loans. Ecommerce businesses, once considered incapable of obtaining loans are becoming a real goliath of commerce. One that is here to stay. Not only can banks no longer afford to ignore these growing enterprises, but excluding them means staying behind. Thanks to developments in the field, there are now more ways to calculate the credit risk even if the company is relatively new.

While ecommerce businesses might not have the history-based data that banks require for traditional lending, there are different ways to assess whether or not an enterprise shall prevail. Technology, once again, offers unique insight in financial appraisal. These days there are developments in tracking and understanding customer behavior through digital analysis. New predictive models are making the success of ecommerce business more certain. Web and social media analytic tools are constantly becoming more advanced, as the need for them grows. Soon, an alternative lender will be able to get all the needed information for any small or medium sized business that requests a loan. Banks traditionally offer loans based on the business’s history. With today’s technology capabilities, alternative lenders will be able to offer loans based on the business’s future.