Lenders want to know that borrowers will pay them back. That means assessing creditworthiness before making a loan and then monitoring borrowers to ensure timely payment in full. Lenders have three principal tools for raising the likelihood of that firms will repay. First, they look for borrowers with a sufficiently large personal stake in their enterprise. Second, they look for firms with collateral that lenders can seize in the event of a default. Third, they obtain information on the firm’s current balance sheet, its historical revenue and profits, experience with past loans, and the like.

Unfortunately, this conventional approach to overcoming the challenges of asymmetric information is less effective for new firms that have both very short credit histories and very little in the way of physical collateral. As a result, these potential borrowers have trouble obtaining funds through standard channels. This is one reason that governments subsidize small business lending, and why entrepreneurs are forced to pledge their homes as collateral.

Well, new solutions have emerged to overcome this old problem. In this post we discuss how technology is increasing small firms’ access to credit. By using massive amounts of data to improve credit assessments, as well as real-time information and platform advantages to enforce repayment terms, technology companies appear to be doing what traditional lenders have not: making loans to millions of small businesses at attractive rates and experiencing remarkably low default rates.

The biggest advances are in places where financial systems are not meeting social needs….