Entrepreneurs operating small companies need to have access to easily available credit at competitive interest rates. Only then can these business owners boost economic growth in the societies where they conduct their commercial operations. In the process, they even generate employment opportunities for other people to improve their existing living standards. This acts as a catalyst in significantly minimizing income inequalities within the population of these societies. However, commercial banks are often reluctant to offer them the financial assistance they need via business loans. In this situation, they have no option but to approach money lenders who charge exorbitant interest rates for providing the funds.
Alternative credit score – How can it re-evaluate the creditworthiness of small entrepreneurs?
Commercial banks depend on credit scores to determine the creditworthiness of small entrepreneurs approaching them for loans. These corporate lenders get this three-digit figure from reliable credit reporting agencies who evaluate it after analyzing the following data:
- The repayment history of the borrowers with a particular emphasis on the number of defaults,
- The total amount of money outstanding on existing loans and credit cards, and
- The credit history of the borrowers and their tendency to pay off outstanding loans on time.
These commercial banks will naturally refuse to give loans to entrepreneurs having a poor credit score. Fortunately, there are credit reporting bureaus who can re-evaluate their creditworthiness by making use of other relevant data. In the process, they come up with an alternative credit score to determine these entrepreneurs’ eligibility for business loans. Alternative credit scoring is the analysis of consumer behavior data available on digital platforms and smartphone applications to determine creditworthiness. This information can come from:
- Data on airtime usage telecommunication companies comply on these borrowers,
- Spending pattern of the borrowers which is available on unified payment interface (UPI) of their smartphones,
- The borrowers’ rent and utility bill payment history,
- Property and income-tax payment details on the government agencies’ websites,
- Current bank account detail, including the number of deposits and withdrawals the borrowers make, and
- Social media digital footprint of the borrowers on the Internet.
How do credit bureaus evaluate this credit score?
Credit bureaus are now operating credit risk evaluation software solutions are incorporating the latest machine learning and artificial intelligence technology. The systems can collect, store, categorize, and analyze vast volumes of big data available on the Internet. This data can come from social media, online banking, and e-commerce sites. The software solution can even derive the relevant information from websites of companies and the government. By carefully scrutinizing the data, the software solutions then evaluate an accurate alternative credit score for the borrowers.
Having a good alternative creditscore opens new opportunities for small entrepreneurs to obtain business loans at competitive interest rates. This credit score even eliminates any form of human bias in re-evaluating their creditworthiness, unlike its conventional equivalents. However, the credit reporting bureau coming up with this credit score should be reliable and have adequate market experience. It has to comply with statutory guidelines of the Fair and Accurate Credit Transaction Act, 2003. Only then can this credit reporting bureau impartially and accurately assess the creditworthiness of borrowers.