Why use accounting data for lending?

There are plenty of data sources available,
but here’s why accounting data should be part of your data strategy.

At Finagraph, our team has helped lenders and accountants unlock intelligence and insights from accounting data for 10 years.

While accountants certainly don’t need to be convinced about the importance of the data in a business’ accounting system, lenders have been slower to include accounting data in their loan underwriting + monitoring processes.

The accounting system represents a single source of financial activity for a business. With software like Strongbox, you can add accounting system integrations into applications and workflows for underwriting and monitoring nearly instantaneously. 


Today’s businesses are used to connecting their business software (bank accounts, accounting systems, eCommerce, etc.) to financial institutions, tax software and business applications in exchange for streamlined experiences. In this modern age, company’s who focus on removing manual steps and customer experience will win the day.

Here’s what you need to know if your company is considering using accounting data in your data strategy.

What is an accounting system used for?

Businesses use their accounting system (i.e., QuickBooks, Xero, Sage) to record and keep track of their financial transactions. Financial transactions in the accounting system include purchases, sales, amounts owed, taxes paid, funding, and any other items that have an impact on the company’s cash position, income statement or balance sheet.

Having all this information in one place helps a business manage their finances, file their taxes and enable reporting to provide the business’ stakeholders insights on financial performance.

Similar to the operating system that exists on your computer or phone, giving you the ability to interact with applications, an accounting system gives users the ability to interact with the financial data of the company (sales, purchases, funding activity, etc.). The accounting system is the financial operating system of the business.

To make recordkeeping easy, most business’ take advantage of features in accounting systems that allow them to connect their financial accounts (bank, credit card, loan, investment) directly to the system so all transactions are entered and accounted for. They may also use an accountant or bookkeeping professional to ensure information is entered and categorized correctly.

With the availability of bank data, what’s the benefit of an accounting system integration?

The small business lending industry has had the benefit of significant technology advancements in bank integrations (like Plaid, Yodlee and others). These technologies allow borrowers to provide financial information in a loan application with just a few clicks, connecting directly to their bank account.


Businesses typically have multiple bank accounts and often with more than one financial institution. To achieve a complete picture of all financial transactions for a company, the data from all bank accounts must be collected and analyzed. From a data collection standpoint, this would require the business to connect to multiple financial institutions to provide all necessary data.


If a full dataset is collected, the next challenge comes from understanding the data. For example, identifying transfers between the bank accounts, standardizing the inconsistent coding for transactions across financial institutions, and combining the data into one, fully representative view of the business. 


If data from only a subset of the business’ bank accounts are collected, this represents an incomplete analysis. Even if a perfect analysis and scoring is achieved on the data collected, it is being made on partial data and can be missing significant transactions that can affect the conclusions.

Accounting data solves these issues:

 

  1. All bank accounts are represented in the accounting system, ensuring that a connection to the accounting system provides a complete view of the company’s transactions.

  2. The user of the accounting system categorizes the transactions into accounts (i.e., payroll expense, marketing, rent, sales, loans). This provides a significant head start to analyze trends, identify attributes and create scoring.

  3. The data is in a consistent format. All data extracted from the accounting system is in the same format.

Common Accounting Systems

These are the most common accounting systems used by small and medium sized businesses:
 

  • United States – QuickBooks Online, QuickBooks Desktop

  • Canada – QuickBooks Online, Sage products, QuickBooks Desktop

  • Australia & New Zealand – Xero, MYOB, QuickBooks Online

See Strongbox integration list

Want to know how Strongbox can help you?