The New York Times recently examined how an “alternative lender” called Kabbage incorporates unconventional information into its credit application processing. In addition to standard indicators of creditworthiness, such as credit scores and accounting records, the company also looks at a range of factors that would be eschewed by traditional bankers.
For example, the number of “likes” a business has on Facebook, the frequency with which it posts and consumers’ level of engagement with the content are among the statistics that Kabbage and other alternative lenders review. They may also look at the amount of traffic that a company’s website generates.
“What we’re trying to do is get a 360-degree view of a small business, not just at a point in time but trying to keep that view over a long period of time,” Kabbage CEO Rob Frohwein told the Times.
Frohwein added that the average default rate on loans made by his company was less than 10 percent. Furthermore, he asserted that the funding provided by Kabbage had helped its customers grow by an average of 70 percent during the six months after taking their first cash advance.
Although taking loans from nontraditional sources may not be right for all borrowers, these organizations may fill a need for some. New York Times contributor Melinda Emerson offered the story of Mitch Rezman, founder of Windy City Parrot, a Chicago pet business specializing in supplies for the care of exotic birds.
Kabbage’s focus on social media and other Web-based metrics was well suited to recognizing the value of Rezman’s company, which had established an e-commerce site in 2002 and was highly active on social media. At the time Rezman reached out to the nonbank lender, Windy City Parrot had almost 27,000 Facebook fans.
Rezman and his wife, who run the business on their own, would post as many as six times per day, sharing pictures of birds using their products, asking trivia questions about exotic animals and even sending out alerts about lost birds. The company had considerable revenues, but large banks rejected several loan applications filed by Rezman, saying he did not meet their requirements.
Although an unconventional financing arrangement worked out in this case, it is essential for businesses to tread carefully when exploring such options. Likewise, lenders must exercise caution when processing credit applications. Using automated risk assessment tools can help ensure that risks are not allowed to “slip under the radar” during the screening process.