For many startups and SMEs, access to credit can either take the business to greater heights or it could be the lifeline that will keep it alive. Ensuring SMEs have access to credit financing would benefit the local economy as the SME sector contributes nearly half of Singapore’s GDP and employs 70% of the workforce. 

There are many reasons SMEs or other firms turn to alternative lenders for their credit needs. For one, it may be that the business is still young - for instance, if they have only been in operation for one to three years. Hence, they have not yet fully built up their track record or gained enough financial information to provide to lenders.

And that is just one side of the lending process.  

On the part of financial service providers, they need to be able to adequately assess the borrower’s risk profile so they can decide whether to approve the loan and determine the right payment terms. This is where the value of a commercial credit bureau becomes crucial.  

What is a commercial credit bureau?

A commercial credit bureau is an entity that collects information about borrowers—in this case, businesses—and provides that business-related data to lenders who will then use it to determine one’s borrowing behavior. They act as a database of information about key individuals (such as directors or the owner of a sole proprietorship), businesses, and other institutions that financial lenders, who are members of the commercial credit bureau, can access.

In essence, lending institutions use the data from a commercial bureau to assess the risk of a potential borrower. This will help them determine, for instance, what are the chances that the borrower will either pay back or default on the loan based on past repayment behavior.

Keep in mind, though, that credit bureaus are not the ones responsible for making the loan decisions, rather they help lenders make faster, more accurate credit analysis.

What is a non-bank bureau?

However, credit bureaus in Singapore often cater to banks and other traditional financial institutions with banking licenses. What about alternative lenders outside of the banking system that provide financing services, as well?

A non-bank bureau acts like a regular credit bureau, except that it provides borrowers’ information to financial technology or fintech companies, insurance firms, credit cooperatives, and other lenders beyond the traditional banking system. And because these lenders commonly lend to the underbanked, non-bank bureaus also become instrumental in addressing the huge credit gap in these markets. 

Non-bank finance plays a critical role in supplementing bank credit for SMEs and those self-employed, notes the Asian Development Bank. In addition, these non-bank financial firms also offer products, such as housing loans, hire purchase loans, and other loans and advances. According to ADB, non-bank financing in Singapore grew from S$6.9 billion in 2004 to S$ 14.7 billion as of August 2019.

Bureau members can use bureau data to perform background checks as part of the customers or suppliers onboarding process, ensuring their partners are cleared from legal liabilities and potential credit risks.

One example of a non-bank bureau is the Experian Non-Bank Bureau. It is a platform for non-bank industry players to collaborate and share their customer's payment information, positive and negative, for credit risk management and debt recovery.

Tap into the network of over 600+ active contributing members with 2.3 million+ payment performance records from registered companies and 1.5 million+ individual payment records updated annually.

With the Experian Non-Bank Bureau, members can check a borrower’s credit and litigation history, develop a risk-based pricing based on the borrower’s profiles, and, essentially, mitigate their credit risk exposure right at the onboarding stage or during their routine accounts review sessions.

Credit scoring and rating

Credit bureaus do not just gather data. They summarise multiple sources of data to generate a credit score or credit ranking to help lenders make faster, more accurate decisions with key insights.  

Experian’s DP Credit Rating, for instance, is a financial risk model that assesses the default probabilities of companies in Singapore, which takes into account six broad categories of risk: Profitability, Capital Structure, Liquidity, Activity, Growth, and Size.

The DP Credit Rating indicates the level of credit worthiness. A rating of DP1 to DP4- is comparable to “Investment Grade,” while DP5+ to DP6- is equivalent to “High Yield” rated securities. When a company is rated as DP7+ to DP8, it means that the company is “High Risk” or there are apparent weaknesses in its financial health, which can, therefore, impact its ability to meet its obligations. 

Meanwhile, the Experian SME Network Score and Experian Alternative Consumer Grade are credit risk scorecards that predict the likelihood of a company and consumer delaying payments by assessing non-traditional financial data such as payments information, negative listing, network characteristics, and payment performance.

Through these credit scoring and rating systems, Experian’s data-driven approach and value-adding services allow members to identify early warning signs of financial destress to mitigate risk or discover growth or new business opportunities in 2021 and beyond.

In today’s fast-paced business environment, lenders need the capabilities to lend more responsibly, quickly, and fairly. Quality data is what makes the difference between uninformed decisions and optimal ones.

Find out more about how the Experian Non-Bank Bureau helps lenders protect themselves from risk by providing quality data about customers, companies, and SMEs.