Jul 1, 2021
Open Accounting enables lenders to leverage up-to-date information in order to provide businesses with the funding their business needs. In this article, we’ll explore some of the benefits of Open Accounting and separate the truth from the fiction.
The decline of personal, day-to-day business banking has led to a lender knowledge gap when it comes to understanding a business customer’s financial situation. Open Accounting seeks to bridge this gap by taking the Open Banking concept one step further.
Similar to Open Banking – a practice that enables finance providers to access a business’ banking information securely – Open Accounting lets businesses grant Trusted Third-Parties (TTPs) access to the data contained in their accounting ledgers.
You could say that Open Accounting provides business finance lenders and services with a 360° insight into the current financial health of a business.
With Open Accounting, a business’ accounting information is readily available, making it quicker for lenders to access recent Profit and Loss statements, purchase orders, credit notes and everything else they need to underwrite a loan or finance facility.
Open Accounting also helps brokers and online business lending platforms like Funding Options identify finance solutions with more attractive terms for their customers.
Until fairly recently, lenders had to rely on historic data to inform their decisions. Now the Making Tax Digital initiative is in full swing, businesses are obliged to keep their digital accounting records up-to-date. Open Accounting taps this rich cash flow information.
Despite the benefits, some people – understandably – still have lots of questions and reservations. Let’s take a look at some of the common myths surrounding Open Accounting.
Data from bank transactions is undoubtedly useful; it provides lenders with some of the information they need to offer businesses finance solutions that fit their circumstances and goals. However, banking data is somewhat limited and it doesn’t tell the whole story.
When paired with Open Banking, Open Accounting can offer a more complete picture of the financial health of a business. Banking data alone only pinpoints transactions and cash movement, and this information can sometimes be misleading.
For example, if a business hasn’t paid its suppliers on time, the cash in its bank account may still be showing as positive, suggesting that the business can afford to repay the loan.
However, in reality, they might not be in the position to do so due to the impending supplier expense.
By having access to the business’ up-to-date payables records, lenders can gain a more accurate insight into the level of risk the borrower poses. In other words, Open Accounting gives more context to a business’ current financial circumstance than Open Banking alone.
Open accounting isn’t complicated for lenders or business – the aim is to simplify and streamline the exchange of information.
Although it’s beneficial, it isn’t compulsory: businesses have to give permission for TTPs to access their data and this can be withdrawn at any time.
APIs (Application Programming Interfaces) are often used to extract a business’ accounting data from the various accounting platforms it uses.
Like a translator, an API is a piece of software that enables two applications to communicate. These APIs are developed by innovative fintechs such as Funding Options.
Open Accounting is designed in a way that ensures privacy boundaries aren’t breached.
A business has to actively say it agrees to provide a TTP with access to its accounting data; it’s not possible to be automatically “opted in” to an Open Accounting service.
It’s important to keep in mind that Open Accounting is intended to be mutually beneficial, providing lenders and services with the opportunity to leverage information that helps them gain a better understanding of a business’ financial needs.
TTPs (in this case, lenders or services) must request access from the business owner who, in turn, grants permission or denies it. As we’ve already mentioned, businesses can prevent access at any time. If permission is retracted, the TTP must delete the data.
Gaining insight into a business’ current cash flow situation is so important and Open Banking can act as a gateway for this information. At a time when many UK businesses are looking to secure funding for recovery or growth, there’s never been a better time to explore the benefits of this new technology.
Aggregating accounting transactions, utility charges and all the other accounting-related documents is a time-consuming and fragmented process. And relying on records from HMRC or Companies House doesn’t reflect the full story.
Open Accounting and Open Banking could turn out to be the perfect solution.
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