Access to credit is a key constraint for entrepreneurs. And limited credit is in part caused by the difficulty of predicting which small businesses will and won’t succeed. In the past, a community bank would have a relationship with the businesses on Main Street, and when it came time for a loan, there would be a wealth of informal information to augment the loan application. Today, community banks are being consolidated and larger banks are relying more and more on data-driven credit scoring to make small business loans—if they are making them at all.
With larger volumes of data being used to analyze everything from the genome to traffic patterns and lunch choices, it is natural to ask whether big data can crack the code on small business credit risk. There is reason for optimism.