Could Social Media Affect My Ability to Get a Business Loan?
BY: BRIAN HUGHES ON THURSDAY, SEPTEMBER 24, 2015
Lending companies are turning to Facebook, Twitter and other social media sites to mine data on prospective borrowers, reports the Wall Street Journal. For some lenders, the data is simply used to confirm identity. Others lenders, however, are starting to use social media to validate a prospective borrower’s credit worthiness. Some entrepreneurs and small businesses see this move as a positive change, allowing individuals with less-than-perfect credit histories to get a “second chance” at proving their loan worthiness. Other entrepreneur’s worry that unfounded, negative customer reviews could unfairly sabotage a loan application. Could changing lending practice impact your future likelihood for small business loan approval? Here's what you need to know.
Social Signals & Credit Worthiness
It’s a well-established practice within the small business loan community that positive feedback from vendors or customers can help nudge along the loan approval process. While this feedback alone cannot prove credit worthiness, it does serve to validate a lender’s decision to make the loan in the first place. Positive testimonials from vendors or suppliers about your ability to make payments on time and deliver goods and services on schedule attest favorably to your loan worthiness. What’s changing now, however, is where lenders are going to get this information. No longer is it sufficient to list several references in conjunction with your loan application, especially if you have a troubled credit history or are working with a non-traditional lender.
Consider this example from Rhode Island entrepreneur Adam Grandmaison, who shared his small business loan experience with WPRI.com Eye Witness News. Grandmaison, who owns a business that sells BMX cycling merchandise online, readily admits he doesn’t have great credit, so it came as no surprise that lenders expressed concern over his credit history. But after Grandmaison showed the lender his business’s Facebook page (with 100,000+ likes) and his Twitter account (with 20,000+ followers), the lender decided to give Grandmaison the loan, thanks to his strong customer support.
“A strong social networking presence really kind of acts as your currency, in terms of it represents who you are online,” says Grandmaison.
Are Alterative Scoring Metrics Good?
With traditional lenders typically favoring larger companies for loans, your social media presence can help lenders see your business as a trusted online authority, just like what happened for Grandmaison and his BMX merchandising business. But with social media and online reviews poised to play an increasingly important role in future small business loan applications, what happens for businesses who unfairly feel they have negative reviews? Will those reviews count against them? According to the Wall Street Journal article, a small business that draws negative reviews on eBay also could undermine its chances of getting more credit. Whether or not social media signals are a good indicator of credit worthiness remains to be seen. What can’t be denied is their usefulness as a means of validation.
“There could come a time where certain social media could be predictive and we’re looking at that,” says Anthony Sprauve, senior consumer-credit specialist at FICO.
How Social Sites Can Help You Secure a Loan
Access to funding is one of the biggest challenges businesses face, especially when it’s time for businesses to scale. Traditional lenders primarily look at the five C’s: character, capital, conditions, competition and collateral. If you don’t have significant physical assets to guarantee the loan or are considered to be a high risk for loan repayment, you could be turned down.
If your business has been turned down for a traditional loan, all is not lost. You can still leverage the power of social media to secure funding. Many entrepreneurs already use social media to drive traffic for crowdfunding sites like Kickstarter, Indiegogo and GoFundMe. Other innovative sites are even using social media as an underwriting tool. For example, LendUp, an online alternative to payday lenders based in San Francisco, told the Wall Street Journal that potential borrowers can voluntarily give LendUp access to their Facebook and Twitter accounts. Kabbage, an Atlanta-based online lender of business cash flow loans, asks borrowers to voluntarily give Kabbage access to their social media accounts, according to NerdWallet. Kabbage’s proprietary algorithm evaluates this information and then decides whether the business is eligible for a credit line increase.
Alternative Lending Options
For borrowers seeking to go a slightly more traditional route than crowdfunding, new online business lenders like SnapCap and Advanced Funds Network work with small businesses that might not otherwise qualify for a loan due to poor credit or limited collateral. Brooklyn-based Advanced Funds Network may approve loan applications even if the borrower's credit score is poor as long as the business can demonstrate an ability to pay back the loan and prove that sales are $10,000 or more. SnapCap works with small businesses that may have limited or no collateral, but can demonstrate order fulfillment, bank statements or the ability to promptly pay off the loan.
Whether a lender is using social media or review sites as a factor in determining a borrower’s creditworthiness or simply to confirm identity, small businesses owners need to be aware how this practice could affect their ability to get a loan. While social signals do not (yet) have a direct effect on the loan amount, rate, or term, it’s important to keep a close eye on your social reputation and online review sites in general. They just might help you secure a loan from a nontraditional lender, even if your credit rating isn’t great.
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