This problem prevents SMEs from doing as much business as they possibly can. Cash flow gaps faced by suppliers of big corporations and government agencies, for example, are huge blockers that limit their growth potential, and small business owners often have to turn down business opportunities that come their way due to a lack of the capital necessary to take them on. This is mainly brought about thanks large buyers having the upper hand in negotiations and extending payment terms to their smaller suppliers for as long as they possibly can – which leaves small business owners waiting for payment for months, and sometimes even years.
And as business expenses pile up while payments from large buyers fail to materialise, the desperate need for capital arises. To solve this problem, small business owners often use their own personal funds or borrow from family and friends. Even worse, they turn to predatory and informal lenders who charge interest rates ranging from 10-50% of the loan amount per transaction.
With most banks requiring large bank deposits and real estate property as collateral before extending credit, it is no surprise that SMEs lack proper alternatives – not to mention the slow underwriting processes caused by a lack of available credit information, and a lack of bank and government guidance on compliance documents.
Mixing non-traditional and traditional data points for credit scoring, fintech innovation has been able to create a reliable alternative credit score for previously unbanked individuals. Fintech startups supported by the Philippine government, such as First Circle, are taking on the challenge of servicing businesses that do not have any prior credit history by using available information sources such as social media and network and cellphone data, as well as building their own database on supply chain networks, in order to determine the feasibility of a loan. This enables these startups to create their own risk scores for transactions presented to them by small businesses, and to prove their creditworthiness despite the lack of traditional credit data.
Fintech companies in Southeast Asia have been making great strides in improving access to financial services for millions of individuals and business entities by shaking up the traditional approaches to credit scoring. With innovative technology beginning to pave the way for the creative use of alternative data, the challenge of accelerating growth for the region’s unbanked and underbanked population in the region is finally being addressed.