Over the last few years the commercial lending industry has undergone considerable change. Low interest rates and a calmer financial climate have ensured plentiful opportunities for both lenders and the businesses they support to grow.

At the center of all this change are SMEs. Previously overlooked, SMEs are now considered an important factor of the US economy and have become a key focus of the lending market. There are many new lenders who have entered the market, and many traditional players are reviewing their business models.

There are four key factors that are motivating SME lenders and shaping the wider industry as a whole:

1. Customer loyalty - what does loyalty mean in today's world, and what drives it?

2. Regulation - in particular, how are lenders reacting to regulatory changes and what impact does this have on their processes?

3. The role of the digitally enabled lender - what does this mean for the lender/client relationship and the engagement model? And what are the new responsibilities of the lenders?

4. Growth rate of the SME market - now the central focus of lenders and regulators. As this market continues to expand, how can lenders support SMEs adequately and successfully? 

Product vs Relationship
We can roughly split lenders into two categories: product oriented and relationship oriented. Lenders that focus primarily on product(s) offer SMEs a more transactional service where they are on-boarded efficiently and there can be very little personal contact between the SME and lender. The focus is on clarity of offer, value for money, efficiency, ease of use, and speed. Relationship-oriented lenders offer a more personal service where they deal directly with clients either digitally or face to face. They are also prepared to offer other provider's products to their customers. They tend to have a deeper relationship (and can have higher valuations when it comes to Fintechs), but they can also be less profitable.

To successfully service the SME market, lenders need to choose where they want to be on the product-oriented to relationship-oriented continuum.

But, regardless of their strategic positioning choice, lenders need data. It all begins with data. 

The omnipotence of data in the finance industry is old news. Every financial institution recognizes the importance of data and the power it has, when properly utilized, to transform their business. But with such a wide range of data sets available, it can be difficult to decide on a clear data strategy i.e. which specific data sets should we focus on and what impact will the implementation of new, data-centric processes have on our business?

New data sets are paraded before the lending market all the time. Now, there are multiple data sources that promise to provide all the information needed to understand customers inside and out. 

When combined, these data sets can be useful for lenders when assessing the financial health of a company. The value of these data types individually varies greatly, as does the level of automation required to access, filter and standardize the data into formats that can be easily analyzed. Whichever category, or categories, you choose to utilize, a truly optimized lending process that harnesses the power of data, must be digital. Any data strategy is there to support a business strategy; we see too often lenders creating expensive data lakes and recruiting talented data scientists before the business strategy is clear. For example, an invoice finance lender should really focus its data efforts on receivables (type, size, amount, concentration levels, actual payment terms, etc.) whereas an overdraft provider should focus on cash flows, competitive positioning of the client, costs distribution, trends and benchmarks. 

The Power of Accounting Data 

The daily decisions and transactions a small business makes can reveal a lot about their reliability for lenders. And there’s no better way to determine reliability, or default probability, than analyzing accounting data.

The beauty of accounting data is that it is black and white- it is objective and very hard to misinterpret which means a fair process for both lender and borrower. 

It can also reveal a lot about the way a company's finances are run, providing an invaluable insight into the day to day management of the business we're deciding whether to financially support or not.

Accounting data offers a truly comprehensive understanding of a clients' business – placing the lender in the virtual seat of the company's CFO or Financial Controller. This level of financial transparency enables the lender to offer a truly personalized service to its clients.

In the past, a personalized service may have been determined by regular face to face meetings with clients or a flexible, informal working relationship. Now, when SMEs feedback that what they need is financial support plus tailored, relevant strategic advice, they are referring to the type of personalized service that would set their chosen bank or alternative lender apart from its competitors.

Lenders have a broad perspective on the market and can benchmark each client against its peers (such as, companies of a similar size or the same industry sector). So, we're back to product and relationship - the two facets of a successful lending approach. Accounting data is key to providing this higher-value service. The data supplies the lender with all the information needed to offer relevant products to an SME and build a successful working relationship with them by providing a deep level of financial guidance and strategy- a truly personalized service.  

The availability and accuracy of enhanced data assets has come on leaps and bounds in recent years in a period of unprecedented change. However, it is critical to remember that the data strategy is there to serve the overall business strategy, and therefore the selection of which data to use, how to access it, which decisions it should drive and how, must be in support of the business goals. It is only in this context that a true digital transformation can successfully happen. The data then becomes a real driver of value, rather than a "nice to have" add-on.

The prioritization, approval, and execution of enhancing data assets is a well-documented challenge. With such a vast array of options, it makes sense to utilize what is readily available. Accounting data is an accurate and insightful data set. It can help power lending decisions, drive efficiencies and mitigate risk. It has always been present, but it's only with recent technological advances that the granular accounting data can be made fully available to support lender's engagement with their customers.

Accounting data is available, accessible, reliable and extremely valuable. It is the natural first place to look when evaluating new data sources to support a modern SME lending business.