Small Businesses Need Credit, Lenders Need a Better Way to Assess That Risk (2024)

Traditional credit scores — for decades, the prime metric to be granted or denied financing — is a bit of a relic, and in the aftermath of a global health and business crisis, it’s simply not that helpful.

In a time of off-the-charts small business formation, the old barriers to capital are coming down. Better to use reams of available data and digital processing to get a real-time picture of a business’s financial health before deciding whether or not to loan them working capital.

Parachuting into this problem is FlowCast, the small army of data scientists behind Tillful, a company aimed at transforming underwriting by finding new metrics for small and medium-sized business (SMB) vitals.

“Our claim to fame is building AI machine learning credit models for banks,” said FlowCast/Tillful founder and CEO Ken So. “We took a lot of that know-how to build Tillful.”

So told PYMNTS that the two corporate cousins are taking specific aim at the problem of entrepreneurs using personal credit cards to float operations.

Noting that more 40,000 small business owners are currently registered on the Tillful platform, So said those customers aren’t just looking for access to capital: they’re also looking to build credit for their business. He estimated that 80% are putting business spend on their personal credit cards.

The problem is that, “If you look at how traditional credit reporting agencies do underwriting or credit assessment, it’s based on what they call trade lines, and trade lines are like Home Depot or Costco reporting payment terms or the payment history of the customer to credit report agencies. It takes months, if not years, to build a credit report” that way, he said.

That presses the question: “How do we separate their personal credit from their business credit? That’s really one of the key goals for us.”

Related: Flowcast Introduces Tillful For SMB Credit Risk Modeling

No File? No Problem

Another problem with SMBs using personal credit lines to fund business expenses is that it adds nothing to the credit file of the business itself, which scares off lenders in droves.

“A lot of these younger businesses are considered no-file or thin-file, so they’re basically credit-invisible to a lot of these lenders,” said So. “How do we help them become credit visible and start getting access to different sources of credit?”

You do it by partnering with high-visibility brands in payments. In this case, Tillful teamed with Mastercard and card issuing platform Highnote on the Tillful Card.

“Within a single login, within the minute, we can ingest the past 12 plus months of historical transactions,” he told PYMNTS. “What Tillful is really good at is taking transaction data and understanding the insight and the credit quality of these small business.”

That granularity is incredibly useful in pandemic-era underwriting for SMBs.

“The [data] that really matters to us are things around cash flow,” said So. “Are you making money from one customer, or thousands of customers? Are your revenues pretty volatile or pretty stable on a monthly basis? Are they growing? The trajectory of their inflow and flow cashflow flow is very important.

“Then, on the spending side, how many employees do they have, do they have a bunch of contracts to a very stable set of employees? All that data we can capture.”

See also: Tillful Launches Card for Small Businesses With Highnote and Mastercard

Matching For Money

With so many SMBs forming and so much capital looking for a safe place to grow into more capital, Tillful and Flowcast are helping connect like-minded SMBs and lenders.

“Some lenders tend to like different verticals, and some will shy away from others,” said So. “We do a lot of the matchmaking because we have all the data on one side, and we are now onboarded with 40-plus different lending partners on the other side.

“Our goal is not just to help fund the top 5% of our user base, but rather 95% and be able to find credit our entire user base.”

When asked to talk about some recent successes, So mentioned that when a startup trucking company was looking to tap into supply chain needs, Tillful scaled that SMB from one truck to five with a loan.

Another borrower, an eCommerce company selling on Shopify and similar marketplaces, needed capital to scale and build up inventory. Tillful found a lender for that business, as well.

So noted that “because our audience or tends to be younger, thin-file/no-file clients, the types of capital that they’re getting [is] typically a $10,000 to $20,000 loan on the Tillful Funding side. Factor rate [can be] between high teens to 30 something percent. These are generally higher cost products. Term-wise, it’s six to nine months. These are term loans.”

Mentioning the prospects for B2B buy now, pay later (BNPL) loans in the company’s future, So said, “Our Tillful Card product is to help serve some of those working capital gaps. We help more so on the vendor side in their expenses side rather than on the AR side. We play more on the other side of the balance sheet for these small businesses.”

Read more: Closing The B2B Trade Credit Gap With AI, Machine Learning