How Data and New Rules Changed the Lending Marketplace
A hundred billion dollars moved through new lending channels. And the banking industry barely noticed.
That’s the headline of Chapter 6 in Charles H. Green’s The Banker’s Guide to New Small Business Finance. But before he gets to the money, he tears apart the tools and rules that were holding the old system together. Or more accurately, holding it back.
Old Thinking Stifles Credit
Green starts with something every small business owner has experienced. You walk into a bank. You fill out a stack of paperwork. Then you wait. And wait.
Sixty to ninety days later, someone calls to tell you no.
That’s the typical timeline for a small business loan application at a traditional bank. Two to three months of processing just to get declined. During that time, the business opportunity you needed the money for has probably come and gone.
But the timeline isn’t even the worst part. The real problem is how banks evaluate borrowers.
The “Five C’s of Credit” are supposed to be the gold standard. Character, Capacity, Capital, Collateral, Conditions. Sounds reasonable on paper. But Green points out that one of those C’s is basically a wild card.
Character.
How does a bank evaluate your character? Usually through a conversation with the loan officer. And that conversation is filtered through whatever biases, experiences, and assumptions that person carries. A young entrepreneur might get written off as inexperienced. A woman might face different questions than a man. Someone with an accent might get extra scrutiny that has nothing to do with their ability to repay.
Green isn’t calling bankers racist or sexist. He’s saying the system lets subjective judgment creep in under the cover of a legitimate-sounding evaluation criteria. And when the answer is no, nobody questions whether “character” was the real reason.
FICO Scores Are Overused and Misunderstood
Then there’s FICO. The credit score that rules everything.
Here’s what most people don’t know. FICO was originally designed for mortgage lending. It was never meant to be the universal measure of creditworthiness that it became. But it was easy to use and gave everyone a number. So it spread everywhere.
The problem is what FICO actually measures. Your credit history is only about one-third of the score. The rest is a mix of how much you owe, how long you’ve had credit, what types of credit you use, and how many new accounts you’ve opened recently.
Notice what’s missing? Income. Net worth. Actual ability to repay.
Green gives a great example. Imagine a wealthy person who paid off their house 20 years ago and hasn’t borrowed money since. They could have millions in the bank. Their FICO score? It could be zero. Or close to it. Because FICO measures borrowing activity, not financial strength.
Then there’s the gaming problem. Collection agencies buy old medical debts for pennies on the dollar. They report those debts to the credit bureaus, which tanks someone’s score. Even if the person never actually owed the money. Even if it was a billing error. The score takes the hit first and asks questions later.
Credit card companies play their own game too. They offer attractive terms to get you to sign up. Then they change the terms after you’re in. Higher rates. Lower limits. Fees that didn’t exist when you applied. All of that activity shows up on your credit report and can drag your score down. You didn’t do anything wrong. The rules just changed underneath you.
The Small Business Financial Exchange
Not everything about credit data is broken. Green highlights the Small Business Financial Exchange (SBFE), a nonprofit that’s been around since 2001.
The SBFE aggregates business credit data on over 24 million companies through Equifax. It gives lenders a way to look at how a business handles its obligations separately from the owner’s personal credit.
This matters because FICO created the SBSS Score (Small Business Scoring Service) using SBFE data. Starting in 2014, the SBA required lenders to use this score for loans under $350,000. It was a meaningful step. Instead of just looking at the owner’s personal credit card habits, lenders could now see how the actual business paid its bills, managed its accounts, and handled its financial obligations.
It’s not perfect. But it’s a lot better than judging a business based on whether its owner had a medical bill go to collections three years ago.
Bankruptcy Shouldn’t Auto-Disqualify
Green makes a pointed argument about bankruptcy. In the traditional banking world, a bankruptcy on your record is basically a death sentence for getting a loan. The conversation ends right there.
But Green asks a simple question. If bankruptcy is so terrible, why did Delta Airlines use it? Why did Chrysler? Why did dozens of major corporations use Chapter 11 to restructure and come back stronger?
Bankruptcy is a legal tool. It exists for a reason. Sometimes businesses hit a wall and need to restructure. That doesn’t mean the entrepreneur behind the business is untrustworthy or incapable. It might mean they had bad timing, a bad partner, or got caught in an economic downturn they couldn’t control.
Writing off every person who’s been through bankruptcy means writing off people who actually learned the hardest lessons about running a business. That’s backwards.
Old Securities Laws Blocked Capital Access
Here’s where Green shifts from lending to the broader capital picture. Before 2012, the rules around raising money from investors were stuck in the 1930s. Literally.
The securities laws passed after the Great Depression made sense at the time. They were designed to protect unsophisticated investors from getting scammed. But they created rigid barriers that blocked legitimate businesses from accessing capital.
The big ones: companies couldn’t have more than 500 shareholders without registering with the SEC. And you couldn’t advertise that you were selling securities. At all.
Think about that for a second. If you had a great business and wanted to raise money from investors, you couldn’t tell anyone about it publicly. You could only talk to people you already had a “pre-existing relationship” with. Which basically meant rich people who already knew rich people.
For small businesses without connections to wealthy investors, these rules were a brick wall.
The JOBS Act Changed the Game
In April 2012, President Obama signed the JOBS Act (Jumpstart Our Business Startups). Green calls it a genuine turning point.
Here’s what it did:
- Crowdfunding for equity. For the first time, regular people could invest in private companies. Not just rich accredited investors. Ordinary people could put money into startups and small businesses.
- Raised the shareholder threshold. The old 500-shareholder limit went up to 2,000. Companies could have more investors before triggering SEC registration requirements.
- Lifted advertising bans. For certain private placements, companies could now actually tell the public they were raising money. Wild concept.
- Raised Regulation A limits. The cap for small public offerings went from $5 million to $50 million. That’s a massive increase in how much capital a company could raise without a full IPO.
None of this was radical. Other countries had been doing versions of this for years. But in the U.S., it took a financial crisis and years of lobbying to get securities laws into the 21st century.
Metadata Is the Real Game Changer
This is the section where Green gets genuinely excited. And it’s the most important idea in the chapter.
Metadata. Data about data.
Traditional lending looks at individual applications one at a time. Does this borrower meet our criteria? Yes or no. It’s a binary decision made in isolation.
Metadata analysis flips that approach. Instead of looking at one borrower, you look at your entire portfolio. You look for patterns. You ask questions that traditional bankers would never think to ask.
For example. Banks have used 660 as a common FICO cutoff for years. Below 660, you’re too risky. Above it, you’re worth considering. But has anyone actually tested whether 660 is the right number?
With metadata, you can. You can look at every loan you’ve made, compare default rates across different FICO ranges, and see whether 660 is actually meaningful or just a tradition that nobody questioned.
Green describes what he calls the heresy of treating credit risk as a line-item expense. Traditional bankers are obsessed with preventing every single loss. They build their entire operation around saying no to anyone who might default.
Innovative funders think differently. They budget for losses. They say: if we make 100 loans and 5 default, that’s a 5% loss rate. Can we price our loans to cover that loss and still make money? If yes, then those 5 defaults aren’t failures. They’re an expected cost of doing business.
This is fundamentally different thinking. It’s the difference between a gatekeeper and an underwriter. A gatekeeper’s job is to keep people out. An underwriter’s job is to price risk correctly and let people in.
When you start thinking this way, the whole calculus changes. You can serve borrowers that banks would never touch. You can move faster because you’re not trying to eliminate every possible risk. You’re managing risk across a portfolio instead of obsessing over each individual case.
Nobody in Banking Noticed
Green drops this fact almost casually. Over $100 billion moved through innovative lending channels while the traditional banking industry was barely paying attention.
New funders were using data and technology to serve the small businesses that banks had abandoned. They were making money doing it. And the banks were still running the same playbook from 1990, wondering why their small business portfolios kept shrinking.
The marketplace changed first. Better data. New rules. Portfolio-level thinking. And then the market changed, because once borrowers discovered they could get funding in days instead of months, they didn’t go back to the bank.
That’s the setup for everything that comes next in Green’s book. The specific products and platforms that grew out of this shift. The old system wasn’t just slow. It was using broken tools, following outdated rules, and refusing to look at the data that was right in front of it.
This post is part of a series on The Banker’s Guide to New Small Business Finance by Charles H. Green, published by Wiley in 2014.