Using Credit Data to Identify Opportunities
If you’re ready to pursue more C&I opportunities after reading our C&I series, do you have a plan for business development? Knowing how to most effectively target your efforts and discern the best opportunities ensures your limited time is spent wisely. Let us show you a tool that will help with both.
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PayNet, Inc. maintains the largest proprietary database of information on small business loans, leases, and lines of credit. It encompasses more than $1.6 trillion in financial obligations collected from more than 300 lenders. It operates on a “give-to-get” policy, meaning everyone who accesses information in the PayNet database agrees to share information about their customers. All identifying information is kept confidential and secure.
The wealth of information available through PayNet can help lenders identify portfolio growth opportunities and mitigate portfolio risk. It’s a helpful tool for balancing risk and reward when pursuing more C&I lending opportunities.
There are two primary ways we use PayNet at VITAL that I think you’ll find helpful for your own new business efforts.
Deciding how to focus your business development efforts can be key to success. Applying pressure to the frontline team to meet specific lending targets won’t be effective if commercial lenders unknowingly look for opportunities in sectors that aren’t growing or in oversaturated markets. Despite their best efforts, they will be swimming against the tide.
PayNet provides market intelligence and insights on credit conditions based on the data it collects from more than 23 million loans. It can accurately capture the current and forecasted lending activity for specific industries, down to the county-level. It also provides insights on credit quality, allowing you to smartly align your strategy with industry and geographic trends.
Example: Mining in Sangamon County, Illinois
Let’s access the PayNet Risk Insight Suite and look at the state of Illinois. Overall, lending activity in Illinois is up, higher than the U.S. average.
PayNet allows me to create a report with a snapshot of lending activity by NAICS code. Mining, Quarrying, Gas and Oil Extraction (NAICS code 21) has experienced increasing loan activity during the last year. Let’s drill down geographically and look more closely at the credit conditions for that industry in Sangamon County.
First, a high-level view. There are 18,156 non-farm businesses in Sangamon County, according to the most recent census data. The PayNet APD (absolute probability of default) shows the national average to 2.24%. The average for the state of Illinois is 2.09%, and the average for Sangamon County is 1.93% – all positive indicators of lower-than-average default rates.
There are 35 mining, quarrying, gas and oil extraction businesses in the county, and the average default rate is 1.62%, well below the average for all businesses in the county. The red box is a caution that overall, default rates have trending upwards – but, I can see in the credit quality distribution that most of the default is happening in the bottom-performing 25% (indicated as "Hi Qtl" for quartile with highest rate of default) of businesses. In fact, in the top -performing 25% of businesses (indicated as "Low Qtl for quartile with lowest rate of default), default rates are actually decreasing, and are a low .45%! This is an industry I would start “mining” for business development opportunities – pun intended!
But how do you know if your business prospect is in the top or bottom 25%? This brings us to our next important use for PayNet.
Identifying Good Lending Opportunities
Credit History Reports
PayNet provides detailed credit history reports for specific businesses, which include something called a “MasterScore” (akin to a credit score) that predicts the borrower’s risk. This information provides powerful data for identifying good lending opportunities and making sound credit decisions.
A PayNet Credit History Report aggregates data from PayNet’s vast database and provides detailed credit data about a borrower’s repayment characteristics with other lenders. A high-level summary outlines how the borrower has historically handled its obligations as well as the aggregate amount owed and how much has been paid down. Payment histories for each loan can include collateral type, financing product, guarantor indicator, term and payment frequency, repayment status and levels of historical and current delinquency.
The Paynet Credit History Report does not rely on third-party reporting. All results are pulled directly from lender computer records through an automated reporting system that runs continuously. In addition, it only measures loan and lease payment histories, not supplier payments, tax payments or any other noncredit payments.
Within the Credit History Report is the PayNet MasterScore, which utilizes 135 critical variables that impact repayment performance. It’s expressed in a score ranging from 450 to 800. Like a consumer credit score, the lower the score, the higher the probability of default.
The ability to assimilate a breadth of factors into a succinct score is a valuable tool for improving credit decisions with little additional effort. Your institution might decide to implement credit decision guidelines based on MasterScore to streamline the process. For example, over a 10-year history, businesses with a score greater than 680 have had a 24-month default rate of 2% or less, with the exception of the years 2007/2008 (and even then it remained less than 3%). You might decide that companies with a credit score greater than 680 are fast-tracked for credit approval.
On the flip side, companies with a score below 620 have historically had 24-month default rates greater than 15%. Those applications might be automatically declined.
According to PayNet, lenders that use the MasterScore have experienced 37.7% fewer losses versus a typical credit score without reducing originations, and a 17.7% increase in approvals without increasing defaults.
PayNet provides valuable insights when your institution is pursuing new markets and evaluating prospects you aren’t personally familiar with. It’s a tool we’ve found a lot of value in at VITAL, and we hope it’s helpful for your targeted business growth.
If you need a partner with C&I lending expertise, contact us any time.