Business Lending Application Model

Small and medium-sized enterprises (SMEs) are integral to the South African economy. They comprise 98% of businesses in the country and contribute 39% to Gross Domestic Product (GDP). Despite their significant impact, SMEs are vulnerable to external economic shocks such as the COVID-19 pandemic or load-shedding. These challenges can severely impact the survival and growth of SMEs and prompt the need for access to business loans.

Business loans are distinct from consumer loans, designed specifically to finance entrepreneurial activities and structured over longer periods with lower interest rates. To ensure SMEs can sustain and grow their operations, a credit provider, and a long-standing client of Matogen Applied Insights (MAI), offers various business loan options, including short-term loans for Bridging Finance, Equipment Financing, and Inventory Finance.

In response to the COVID-19 pandemic and the impact of load-shedding, MAI assisted the credit provider in developing an application model for approving commercial loans for both new and existing clients. The model utilized logistic regression, using the credit provider's client data in conjunction with a credit bureau model as inputs. Demographic and business metrics were considered critical inputs into the model due to the lack of behavioural data.

Building on the initial model, MAI continued to refine the loan application model by correcting biased sampling, constructing Accept/Decline and Take-Up models, and building a separate Take-Up/Not taken-up model for follow-up sales. The final scorecard and Take-Up model produced by MAI showed a marked improvement, with swap set analyses indicating that the new scorecard would increase lending volume while reducing default loans, contributing to the credit provider's profitability.

External shocks such as the COVID-19 pandemic and load-shedding can drive the need for access to business loans for SMEs. However, loans are also essential to help these businesses grow and sustain their operations. The credit provider's improved loan application model is a testament to the effectiveness of such financing solutions in navigating the challenging post-2020 business environment.