What Is Creditworthiness Post-Pandemic?
Jorge Sun is CEO and Co-Founder of LendingFront. getty  For lenders and community banks, defining creditworthiness has always been tricky, especially when it comes to small businesses. And today, the application parameters and qualifications for creditworthiness dont always reflect the economic reality of many small businesses in the wake of the pandemic. Theres not only a greater proportion of small businesses with debt  79%, which is up from 71% in 2019  but many businesses now carry more of it. Moreover, 57% of small businesses would characterize their financial situation as fair or poor, with Black- and Asian-owned businesses experiencing disproportionately greater hardships, according to the Federal Reserves 2021 Small Business Credit Survey. Firms have also reported getting rejected for loan applications more frequently. By reframing creditworthiness altogether, community banks can expand their pool of potential applicants, continue to mitigate risk and gain an edge over their competition. Historically, lenders and community banks have considered lending to small businesses a riskier proposition than lending to larger businesses. However, the problem is that many loan applications use criteria geared toward large businesses, so small-business owners are automatically set up to fail. As a small lender, community bank or community development financial institution, you may find it difficult to turn down businesses time and time again  especially knowing the next great idea could be out there. Whats more is you know you have a responsibility to businesses in your community. The good news is you actually dont always have to say no.  Reimagining Creditworthiness To Support More Small Businesses  For small businesses today, creditworthiness isnt so black and white. In the past year and a half, some business owners have had to temporarily pause operations, reduce their staffing, rehire, redirect funding and (in many cases) completely pivot their strategy. As a lender, its critical to be financially prudent, but its also important to evaluate businesses holistically to get the complete picture.  Use small-business-specific application parameters. Small businesses have different needs and financial statements than larger enterprises. Adopting more flexible criteria that factors in the financial health of these types of customers may help you deliver better news. More on what these criteria can include in my next point.  Look at a businesss cash flow. For a small business, cash flow is often a much better indicator of success than tax statements or other paperwork. Compare pre- and post-pandemic cash flow levels to get a better sense of how a small business will perform in the future as society reopens. You can break it down further by looking at whether the business is up or down year/year and looking at the businesss payroll expense (is it increasing, indicating theyre hiring more staff?). Additionally, you can look at how often (if ever) their bank account dips into the red, indicating either a problem with cash management or other unexpected issues.  Automate your process. Small-business-specific lending software can help you manage risk and review more applications, more quickly. You can even automate loan requests under a certain amount (like $25,000). If a small-business owner also does their banking with you, you can pre-approve loans  boosting your revenue while supporting more customers in your community.  Offer realistic repayment options. Understand that businesses need flexibility as they continue to navigate uncharted waters. Reopening guidelines could change any day causing some businesses to modify their plans. As the country navigates the waning pandemic, small lenders and community banks have a responsibility, and an opportunity, to help their local businesses. There is a light at the end of the tunnel, and supporting your community will help small businesses re-emerge stronger than ever. Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms.