5 myths about commercial affordability data in SME lending

Myth 1: Affordability data is unreliable

One of the most pervasive myths is that affordability data is unreliable. This misconception often stems from a lack of understanding of how this data is collected and analysed. In reality, it is derived from a variety of reliable sources, including financial statements, credit reports, and transactional data. These sources provide a comprehensive view of an SME’s financial health, helping you make more accurate assessments.

In recent years, advancements in data analytics and machine learning have significantly improved the accuracy and reliability of commercial affordability data. By using the latest technologies and broader datasets, you can identify patterns and trends that may not be immediately apparent, helping create informed lending decisions.

Myth 2: Affordability data is only relevant for large enterprises

Another common myth is that affordability data is only relevant for large enterprises and not for SMEs. This couldn’t be further from the truth. Affordability data helps you understand the financial capacity of these businesses to repay loans. SMEs often have unique financial profiles that need a tailored approach to lending; one supported by more data and better insight into an organisation’s financial circumstances. For example, an SME may have seasonal cash flows or irregular income patterns that need to be considered when assessing their ability to repay a loan. You can then account for these nuances, ensuring that SMEs receive the appropriate level of financing.

Myth 3: Affordability data is too complex to use

Some lenders believe that affordability data is too complex to use effectively. While analysing affordability data requires a certain level of expertise, it is not insurmountable. Simple tools and services are available to help simplify the process, making it accessible to lenders of all sizes.

These tools often include user-friendly dashboards and reports that present affordability data clearly and concisely, as well as dedicated training and support to help you interpret and use this data effectively. Our Commercial Affordability solutions include a number of helpful tools such as pre-calculated affordability limits, estimated monthly payments, and affordable limit utilisation; using these resources can help overcome the perceived data complexity.

Myth 4: Affordability data is not necessary for secured loans

There is a misconception that affordability data is not necessary for secured loans, as the collateral provides sufficient security for the lender. However, this myth overlooks the importance of understanding an SME’s ability to service the loan. Even with collateral, if an SME cannot afford the loan repayments, the risk of default remains high.

Affordability data helps you assess the ongoing financial health of an SME, looking at all financial commitments of an organisation and ensuring that they can meet their repayment obligations without jeopardising their business operations. This not only protects your interests but also supports the long-term success of the SME.

Myth 5: Affordability data is static and doesn’t reflect recent changes

Some believe that affordability data is static and doesn’t reflect more recent changes in an SME’s financial situation. While it’s true that traditional credit reports may not capture the latest change data due to reporting lags, modern affordability assessments incorporate dynamic data sources, giving a more up-to-date and accurate reflection of the latest circumstances. These sources include real-time transactional data through Open Banking and Current Account Turnover (CATO), cash flow analysis, and other financial indicators that provide a current view of an SME’s financial health.

By using a greater breadth of data, you can make more accurate and timely lending decisions. This dynamic approach ensures that affordability assessments remain relevant and reflective of an SME’s current financial situation.