There’s been a lot of confusion in recently about whether social media activity affects your credit after a story in the Financial Times headlined: “Being ‘wasted’ on Facebook may damage your credit score.”
“If you look at how many times a person says ‘wasted’ in their profile, it has some value in predicting whether they’re going to repay their debt,” FICO Chief Executive Officer Will Lansing told the FT. “It’s not much, but it’s more than zero.”
After that comment raised eyebrows, FICO — creator of the most widely used credit-scoring system — clarified that “at this point, social media data is not part of any FICO score.”
Meanwhile, earlier this year, Facebook made waves over news that it had patented technology that could check your creditworthiness based on your friends’ credit ratings.
The concerns seem to swirl around this issue: Is it creepy for your social media network to be used to determine your creditworthiness?
But that question misses the point. You should always assume your social-media accounts are being examined when applying for a business loan.
A question of character
Lenders our small-business team interviewed say social-media activity already is a factor in loan applications. It’s just a matter of degree: It may be as simple as cross-comparing your employment history with your LinkedIn profile to verify data or look for red flags. Social-media streams are already being mined for possible fraud prevention and identity verification.
For some alternative lenders, your social footprint is an actual input in their application. Lenders examine applicants by the 5 C’s: capital, credit, capacity, collateral and character. “Believe it or not, your social media footprint can help us flesh out one of the most important C’s: character,” peer-to-peer lender Funding Circle says.
If you don’t know your banker well and she or he sees something negative about you or your business online, your character takes a hit.
Litmus test for your business success
Lenders use your social-media feed not just as a character test but also as a way to determine how well you engage your customers — how well you’re running your business and how happy your customers are with you.
Small businesses use social media more than any other form of media to spread the word about their businesses. According to the BIA/Kelsey Local Commerce Monitor,73 percent of small businesses use social media to promote their companies — far more than any other form of marketing.
Here’s where a strong social network can strengthen your loan worthiness. “We don’t use social data to make a primary decision,” Kabbage co-founder Kathryn Petralia said in an interview with the NerdWallet small-business team. “What we have found, though, is customers who have active Facebook and Twitter business accounts are 20 percent less likely to be delinquent than those who don’t.”
Context matters. Social-media accounts are especially powerful for companies in industries that sell goods and services directly to consumers — retail, restaurants, consultants, piano teachers and the like. Social media activity isn’t as powerful if you’re a B2B business, such as a wholesaler who sells parts to Boeing.
Loan officers judge social media accordingly. If a lender is looking at an application for your restaurant, you can expect an examination of your Yelp reviews. The social media footprint of, for instance, an accounting business would be less important.
“Strong and active relationships with existing and prospective customers on social media can be reliable revenue drivers for your business — and a signal to lenders that you have a loyal customer base,” according to Funding Circle. “Lenders can look at your Facebook and Twitter activity to see what customers are saying about you, and how quickly and effectively you respond to comments and complaints.”
Cleaning up your act
Common sense often fails us in our youth. If your social media footprint is deep and sullied by youthful indiscretions — perhaps too many photos featuring red cups or online arguments that crossed a line — then you might want to clean up potentially offensive posts and photos.
One easy way to protect yourself: Consider increasing your privacy settings on Facebook and other social-media sites. It’s faster than editing and deleting all those party photos. But it’s not foolproof. As we noted above, many alternative lenders require access to your social-media accounts during the application process.
You wade into dangerous territory when your social-media accounts move toward the core of your identity and character: Personal views on religion, politics, race, gender and sexual orientation are all likely to upset someone. It’s fine to exhibit strong preferences — a local restaurant or sports team you love is fair game. Just keep it out of the realm of the potentially controversial.
Align social strategy for growth
Social-media activity does influence loan decisions, and trends suggest it will become an even more important factor in the future. But social media alone likely won’t sink — or save — your loan application. Your business’s financial picture far outweighs how many people “like” you on Facebook.
But your social-media footprint can tip the balance for or against a loan if your business is on the margins of acceptable.
Think of it like college admissions: You can ace the interview, but you’ll never get into the Ivy League with terrible grades. If you have pretty good grades, though, then a great interview could tip the scales toward acceptance. The same is true with social media and business loans.
Social-media strategy should be tightly aligned with efforts to increase revenue. Think first and foremost: What will grow my business? How can social media augment or accelerate that growth? And then execute.
In doing so, you drive further growth and, therefore, better financials — which, no matter the rising importance of social media, is and will always be the top driver for a successful loan application.