How to find and vet one of the trickiest customers: Microbusinesses

Published 24th Jul 2017
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Microbusinesses are a diverse bunch. They range from cake decorators to nano-breweries, with a few investment groups and offices that license intellectual property sprinkled in for good measure. It’s hard to say that all of the businesses out there share even one thing in common. But one thing is clear: There are a lot of them, more than 20 million by our count.

Just by sheer numbers alone, there are almost certainly great clients, and fantastic opportunities among them. That is, if you have the data to make decisions. But microbusinesses, like their larger siblings, come in all sorts of flavors. Understanding the risk profile of any particular industry can be challenging. Survey-based datasets – the kind most often relied upon in making decisions – suffer from the garbage-in, garbage-out problem that has launched a thousand business follies.

Powerlytics data is different. Our database includes financial statements for all 30 million for-profit businesses in the U.S., broken down by sector, size, and zip code.

In May, I had the privilege of speaking at Experian’s annual conference about the micro entrepreneur, where I showed the assembled investors, analysts, and executives how our data can open doors to the dynamic and growing community of micro-businesses for both market prospecting purposes and business income verification purposes.

Finding your target

First, we started with a question. What sectors are growing fastest? In a sense, aggregate top-line revenue growth might be a good place to start, but that can be misleading. There may be a spike of new entrants in the market giving a shakier growth outlook. At the same time, some businesses may want to target industries with lots of new entrants as a way of getting in on the ground floor of a profitable sector. Net Profit could be a better indicator of what makes a good customer segment to target. Whatever the key ingredient is, we have it.

For example, let’s look at beverage manufacturers. There has been an explosion of the number of sole proprietorships with zero to four employees in this industry between 2011 and 2016 – the number of businesses nearly doubled. But when looking at slightly larger businesses, those with five to nine employees, beverage manufacturers don’t rank in the top five. And neither category ranks in the top five for sales growth – an indication that the beverage sector might contain a large number of new entrants, fighting hard for a relatively static market.

After identifying the leading growth sectors, we demonstrated the importance of zip code level data. Targeting an industry at the national level – and even the state level – can provide a misleading picture. The fact that a sector looks attractive in aggregate is not necessarily indicative that will be attractive at all locations. In fact, we see considerable fluctuation at all sorts of geographic levels. When comparing businesses by region – the northeast U.S. versus the southwest, we see big differences. The same holds true at the state, county, and zip code level.

We also noted differences if the target is a corporation or partnership versus a sole proprietorship.

Whether your industry is insurance underwriting, subprime lending, prime lending, or something else, when targeting sectors, it’s important to know that the prospects match your use case. So we layered in data on critical items such as solvency, leverage, and liquidity risk. This allowed us to fine tune the sectors and locations to put forth concentrated marketing efforts.

While it sounds like a daunting task to really understand what is going on with the 20 plus million business that fall into the micro business sector, Powerlytics Market Intelligent Platform made sifting through the vast quantity of data to get to actionable information easy.

Knowing your customer

For lenders and others targeting small and growing businesses, Powerlytics brings a level of comfort to the question: How good is the data we rely on to make decisions?

It is especially important when dealing with microbusinesses. While the number of microbusinesses grew by 10.5 percent between 2011 and 2016, this segment of the economy quite often relies on owners’ personal credit for startup costs or trade financing. The information that other data providers provide on private companies relies on surveys, just as it does with business financial information. Powerlytics’ database also covers over 200 million adults, with actual information. The accuracy of our income data has been confirmed in blind tests with some of the largest banks in the U.S. This provides a level of comfort when targeting business owners when you need accurate, real time data.

It can be difficult to find comparable businesses for these tiny enterprises, making loan worthiness decisions less certain. What lenders need is a way to examine credit-worthiness independent of the information supplied by an applicant in order to benchmark the business compared to a true peer group.

By using Powerlytics’ data, lenders and others are able to measure the health of microbusinesses as well as the health of the business owner. This provides a striking source of information about comparable businesses, a powerful lens that can help lenders spot qualified microbusinesses. That’s because just as neighbors often have similar incomes, businesses in the same industry, with the same size and legal structure, often have a lot in common.

The right tool for the job

So what’s the upside? With Powerlytics’ data, you can drill down to an unprecedented level of granularity. While our data cannot give you a named business’s financial statements, we can give you an industry sector and zip code combination that can be matched with other sources to determine the exact businesses to target. This can also be used to set a strong benchmark that includes the named business and all others that match its industry sector, size, and location or to score and rank areas across the U.S, that are the best suited for your business to target. This is useful for risk assessments,  income verification, and for B-to-B marketing.

Want to know where the most successful independent coffee roasters in the Pacific Northwest are located? Our data can do that. Our data can even dig down to compare interest coverage ratios for sole proprietorships in a specific industry and zip code, and then do the same for corporations and partnerships.

When it comes to income verification, we can accurately estimate and verify a business owner’s income based solely on their 9-digit zip code (aka zip+4).

Whether it’s microbusiness financial information or business owner information, we provide a level of confidence that’s hard to beat.