In a flurry of alternative lending-related articles this week, the Wall Street Journal wrote again on small business finance today, with a focus on whether your use of social media can help or harm your ability to secure credit with lenders in the future.

What does this mean for small business owners?

According to the article, eBay small business loans could undermine its chances by drawing negative reviews, according to some lenders. Companies pioneering the practice generally lend to borrowers with troubled credit histories or no bank accounts. They say the use of alternative scoring metrics helps make credit available to people who might otherwise be denied.

“There could come a time where certain social media could be predictive and we’re looking at that…” said Anthony Sprauve, a senior consumer-credit specialist at FICO.

Whether or not social media signals are a good indicator of creditworthiness remains to be seen. What can’t be denied is their usefulness as a means of validation.

How does social media help your business?

Alternative lenders that operate wholly online don’t benefit from the typical face-to-face interaction that traditional branch bankers have. This means that the validation of a real operating business becomes crucial as a fraud prevention measure and is vital to making a good credit decision.

In that regard, a business that has a social media presence and demonstrates evidence of interaction with customers sends positive signals to the lender that there is something real there. A trend of an increased volume of followers and customer interaction, for instance, could serve as one method of validation of an increasing sales trend.

Combined with other forms of validation, social media inputs can improve a lender’s ability to make good loans. If lenders use these signals as an additional means of validation, there is little potential for disparate treatment to borrowers as long as other means of validation are being employed. If social media signals have a direct effect on the amount, rate, or term that the borrower qualifies for, that is a different matter.

In any case, lenders should be transparent about which measures are used to assess credit risk. Everyone knows that a FICO score is typically a component of a lending decision, so borrowers have an opportunity to clean up their personal credit before they apply for a loan. If lenders are using social media signals in a specific way, they should make that known to potential borrowers so they have an opportunity to manage their social media presence before applying.

At Dealstruck, while your social media presence helps us verify the existence of your business, it doesn’t currently have a direct impact on how we evaluate your creditworthiness. As we continue to refine our loan approval process, however, we may assess how this information may be leveraged to structure loan offers.

What’s the moral of it all?

If you are a small business owner seeking capital, be sure you are aware of your social media presence. It could help you in more ways than just gaining PR and customer support.

Do you have any questions about growing your small business? Contact us anytime. We’re here to help!