New data sources: How they can help the SME invisibles

Tying to expand any business takes investment, but with smaller businesses often lacking sufficient cash, securing additional funds can be the solution to grow and become more productive. Unfortunately, a lack of financial information can limit a business’s chances of doing this.

This is the case for more than 1.6 million businesses in the UK who struggle to access growth funding, or trade credit, because there is very little information available about their financial track record. The absence of credit information means these small or medium-sized enterprises (SMEs) can be considered higher risk when it comes to lending.

Accessing business loans and trade credit requires a strong credit history, but these SME invisibles are either too new to file their first set of accounts, or only submit a balance sheet which doesn’t include profit and loss. As a result, they may struggle to access the growth funding needed to take their business to the next level, or even trade credit to buy products and materials.

This is a challenge that’s not easy to solve. However, progress has been made in recent years by finding new and appropriate data sources to work with. Through this work, we have already seen a reduction in the SME invisible population by almost half. At Experian, we think that Open Data can help us reduce this to zero by enabling businesses to contribute their own information, so they can thrive and contribute to our economy in even greater numbers.

There are an estimated 4.4 million live incorporated businesses registered with Companies House, however 700,000 of these are not currently trading so have no requirement to access finance. Some 200,000 more businesses file full accounts which include profit and loss figures, so have ‘thick’ credit files with enough information for lenders to confidently make credit decisions.

We’ve taken this invisible population of 3.5 million and reduced it to 1.6 million by adding new data sources. These sources include voluntary Credit Account Information Sharing (CAIS) and the Government’s mandatory Commercial Credit Data Sharing (CCDS) scheme, which covers Current Account Turnover (CATO) data as well as credit accounts.

We estimate that around 300,000 SMEs that would previously have struggled to access credit due to lack of information will see their credit scores improve when this information is considered, to the extent they will no longer be perceived as high risk by lender.

Open Banking technology also provides small businesses with faster access to funding by eliminating much of the paperwork required to apply for finance and allowing SMEs to share bank transaction and management account information with a lender within minutes. It also reduces the risk for lenders and the cost of serving SMEs.

By using these news data sources, lenders and trade credit providers are able to improve the quality, speed and consistency of their decision-making process. It can also help to ensure that viable smaller businesses continue to have access to the financial services they need to play a fundamental role in the thriving UK economy.