Alternate Credit Scoring for SMEs
Conventional method of scoring and evaluating is soon becoming a thing of past. In fact just scoring no longer would remain the only way for evaluation of a particular entity. Credit history was the only source that was taken into consideration while evaluating a customer for his credit worthiness. With the surge in demand for credit and a good portion of this demand not being serviceable by the conventional routes, urges the industry to seek alternate routes that can provide a better picture on the credit worth, credit history just being one of the many aspects of it.
Cash Flow Analysis model has come up as the obvious alternative for the pre existing bureau check, though it is being used in pairs by various lenders to get a better picture in their evaluation of the customer.
Alternate sources of data like social media, smart phone apps data, utility bill payments etc can be used to gain further insights about the customer. Data like credit period availed from the vendor, or the same given to the customer to pay the money can give meaningful insights in the turnover cycles of the business and hence put the evaluation process in a better position to make a decision as it now has more than one data point to analyse. In summary, turning the behavioral attributes into sources to create a credit score which can give a holistic view.
Further, machine learning can be used to create predictive models on these attributes, analyzing the cash flows of the business and predicting the time periods during which the business would be cash deficit and when it would be with cash surplus, hence giving the signal to the business well in advance and arranging solutions for the same for either of the situation.
For example a restaurant which is listed with a few hyper local companies can be evaluated for their credit worthiness not just from their cash flows and promotional offers they provide, but also from the ratings and the reviews given to it by the customers, a consistently good rating and reviews received basically means that the business is doing well and can be expected to pick up as the customers are likely to give repeated patronage.
This would not just help the credit providers with understanding the borrowing and repayment pattern of the borrowers, but also help them minimize the risk they are taking at present and help them turn a particular loan portfolio profitable in a shorter period of time.
Thus, a cash flow based score is a win-win for both the lender and the end customer.
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