Small Business Credit Scoring and Credit Availability

Abstract

This study examines the use of small business credit scoring (SBCS), a newly introduced technology to quantitatively evaluate small businesses applications for micro credits of less than $250,000. Credit scoring statistically predicts the likelihood of borrower default or delinquency. SBCS data is primarily personal consumer data on the owner. It can be used to evaluate opaque small businesses as well as to reduce underwriting costs for transparent borrowers. This study of SBCS is based on 99 responses gathered in a telephone survey conducted by the Federal Reserve Bank of Atlanta in January1998. Gathered were data about credit sizes scored; use of scores for approval or setting credit terms; use of vendor-supplied model; and length of use of SBCS. Found that all banks using SBCS used it for loans under $100,000, and 74.2 per cent for loans under $250,000. Credit scores were used by 41.9 per cent of banks for automatic approval or rejection, and affected credit terms at 32 per cent of institutions. Most banks used vendor-supplied models. Research and public policy implications are discussed for four areas: (1) banking industry consolidation and emergence of large nationwide banks; (2) geographic definition for banking markets; (3) potential development of secondary markets for small business credits; and (4) proliferation of SBCS technology. (TNM)

Keywords: Credit ratings, Federal Reserve Bank of Atlanta, Secondary markets, Credit, Financial markets, Access to capital, Banking industry, Bank loans, Financial policies, Lending policies, Public policies