March 13, 2014
Placentia, Calif., resident John Frank Robinson V scrimped enough over eight years to open his own business, RoadShields, an automotive-glass online distributor and retailer.
Robinson turned to an alternative-credit provider in 2011 for a quick infusion of capital to grow his fledgling company after Wells Fargo turned him down for a loan.
In three years, the 31-year-old has been extended roughly $100,000 in credit, and his social-media profile likely played a role.
Online reviews for services, from car parts to house-made chips and salsa at your favorite Mexican restaurant, aren’t just for consumers. They’re also creating an audience in the lending and credit marketplace.
Following the lead of employers, alternative financial firms are increasingly checking Twitter and Facebook accounts of applicants to vet data and help determine creditworthiness.
The idea is to build a more complete image of the companies under consideration to be funded.
“Lenders (think), ‘Are they going to pay me back or not?’ ” said Fadel N. Lawandy, assistant professor and director at Chapman University’s Hoag Center for Real Estate and Finance.
Now with the existence of social media, firms can show how well their products are received and perceived in the market, Lawandy added.
“If they’re appealing,” he said, “then there is a high chance of the company being able to sell more products,” he said.
More insight into applicants can translate to fewer defaults and delinquencies — and a better bottom line.
That’s especially important for alternative institutions working with higher-risk, small businesses who have been spurned by major banks due to lack of credit history or credit blemishes. This demographic typically turns to alternative institutions as a last resort.
Those testing this new layer of underwriting aren’t major banks but smaller financial firms that cater to businesses that need quick cash but lack credit history.
Analysts at American Finance Solutions, an Anaheim, Calif.-based provider of cash advances to independent merchants, examine Google reviews, Facebook posts and other social-media data for all applicants during the qualification stage, said Chief Executive Scott Griest.
Griest said an ideal borrower generally has favorable customer reviews and is openly addressing customer criticism. Those characteristics show the business is growing and may be less of a credit risk.
“If on social media (customers give) five stars for a new chef and they need money for new marketing, then that’s good sign,” Griest said.
Business owners who demonstrate good social-media standings, in turn, can be rewarded with better cash-advance terms and access to additional funding, said Griest, who declined to give specifics on his privately held firm’s vetting process.
The firm reports it has issued more than 10,000 cash advances totaling more than $100 million.
Social-media analysis is less important but still a factor at Kabbage, an online credit provider based in Atlanta.
Once clients get approved for funding, they have the option of linking Twitter and Facebook to their credit accounts for future checks. If Kabbage likes what it sees in customer interactions, available credit might be increased.
Kabbage has shown confidence in Robinson, owner of RoadShields, by continually upping his credit limit. Part of that confidence lies in his Facebook and Twitter profiles, which he linked to his account two years ago.
“I think if you were to look at companies that spend time investing in communicating with customers and engaging them, then that means you’re detailed in your financials or other items on your balance sheet,” said Robinson, who has his headquarters in Anaheim and a shop in Santa Ana, Calif.
Kabbage found that clients who have a strong relationship with customers on social media had a 20 percent lower delinquency rate than customers not active on social media, said Victoria Treyger, a spokeswoman for Kabbage, which has advanced $200 million to small businesses.
Nonprofit lenders who typically help disadvantaged borrowers are part of the social-media trend, too.
Valley Economic Development Center in Van Nuys, Calif., looks at Yelp reviews and is eyeing LinkedIn, a website that connects business contacts, to see how loan applicants interact with other firms, said Brandon Napoli, director of microlending.
Lending to riskier, underserved communities has largely been based on gut feeling. Adding social media, a “raw, free marketing tool,” can make lending calls more certain, Napoli said.
He often brings up negative reviews during the prequalification phase to allow applicants to explain themselves. Often, they’re honest and can provide context for the review, Napoli said.
That has been the case with Carla Ulloa, a loan specialist who serves California’s Inland Empire through CDC Small Business Finance.
No one has been declined funding because of a bad review, Ulloa said. Instead, borrowers should perceive social media as “more like a cherry on your cake.”
There are no rules dictating how lending institutions can use social media during the underwriting process. But the Consumer Financial Protection Bureau is tracking the trend, which is not without potential problems.
For one, social media is rife with fake posts and reviews, positive and negative.
But those using social networks as a lending criteria say the fakes are usually easy to point out. And lenders like Napoli only take social media data into consideration when there’s a large enough sample. With Yelp, he only looks at a profile if it has 15 or more reviews.
Another worry is that social-media reactions are hard to quantify because interpretation is subjective, said Lawandy, the Chapman professor.
What does a good or bad social-media profile look like? And how does that translate to creditworthiness?
“There’s always concern when there’s a lot of room for interpretation,” Lawandy added.
WORDS OF CAUTION
Merchant cash advances can be a great way for small businesses with short or blemished credit histories to get fast cash. It’s worth noting, however, that they can be pricey.
How it works: A small business takes out a cash advance and gets charged a fee. The business typically has a percentage taken out of credit-card transactions until the advance and fee are repaid. The annual interest rate can range 35 percent to, in more some rare cases, 200 percent.
An American Finance Solutions customer who takes out a $30,000 advance can expect a fee of $7,500 and a $295 due-diligence fee. If repaid over nine months, the annual percentage rate comes out to be nearly 35 percent. The average U.S. credit card APR is 15 percent.
SOURCES: AllBusiness.com, CreditCards.com and American Finance Solutions
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