Online and other alternative lenders benefit from providing lending services to the small businesses that are underserved by the traditional banking community. The challenge is identifying those small businesses that are credit-worthy but unable to secure the lending facilities they require from their bankers. To be able to market efficiently, alternative lenders need to target small businesses that have a high probability of needing a loan as well as acceptable risk characteristics.
Finding these prospects requires going beyond standard demographics. Business size, which is often used as a primary selector, can be misleading. Businesses in different industries are subject to different financial dynamics that affect demand for loans, so a smaller firm in one industry can both have a greater demand for lending services and require larger lending package than a bigger firm in another industry. And because almost all small businesses are captive to the characteristics of their local markets, local economic trends will also affect their demand for loans.
Targeting underserved small businesses requires a multi-step process that overlays analytics and enhanced selectors such as loan demand and financial indicators. Here’s what you need to do:
1. Target: Identify the businesses in your target segment that have a high probability of needing a loan and that also offer acceptable risk characteristics
2. Prioritize: This pool of small business candidates then needs to be prioritized based on those businesses that display the highest loan potential with the least amount of risk
3. Select: From this prioritized pool, you can then select the top candidates for your marketing efforts
The benefits of this approach, compared to the use of standard demographics to generate a marketing list, are higher response rates, translating into more loan applications received. In addition, a higher percentage of loan applications will be approved due to the pre-screening, and those loans will be bigger as well. The result is greater marketing efficiency and lower underwriting costs.