Business Credit Scoring: Is It a Killer Application or Application Killer?

In his 1968 seminal novel, 2001: A Space Odyssey, Arthur Clark introduced HAL, a spaceship computer with artificial intelligence. Mission engineers designed HAL to carry out an array of technical orders to safeguard the ship's mission. HAL operated flawlessly until it reported the failed operation of a ship system that was operating perfectly. Rather than correct the mistake, HAL's logic dictated that it would be more efficient to kill the ship's crew. Ever the polite computer, HAL killed quickly and quietly until it was unplugged by the sole remaining crewmember, Dave Bowman.

Many small business owners believe that HAL's progeny are carrying out HAL's murderous mission in the small business credit arena. Computers now make important credit decisions for major banks and financing companies. Each day in the U.S., computers with fancy algorithms score thousands of small business credit transactions. Though credit-scoring models work well for most small companies, many believe these systems, like HAL, have run amuck. Routinely, transactions with low scores are turned down and applicants are notified of the decision by computer-generated rejection letters.

By gaining a better understanding of the credit scoring process, you may be able to help your firm maneuver in the new world of credit scoring. Here are some key points about business credit scoring worth noting:

1. Credit scoring automates the credit evaluation process. Credit providers use these systems to speed up loan processing, to cut processing costs, to quickly adjust rates and terms to match credit risks, and to add a high degree of objectivity to credit decisions.

2. Credit scoring is a predictive system based on statistical modeling. Scoring systems are designed to forecast whether borrowers will be successful in repaying loans. Many systems use up to 20 factors to evaluate credit worthiness.

3. Many lenders and leasing companies use credit scoring for business transactions under $100,000. Over 90% of major credit providers use credit-scoring systems on transactions below $ 50,000.

4. A pioneer and leading credit scoring service, Fair Isaac and Company, researched statistical credit modeling in the 1980s. They determined that the personal credit behavior of a company's key principals/owners is a strong predictor of their business credit behavior. Simply stated, a business owner who pays personal bills on time generally will cause his/her company to pay bills on time.

5. The Fair Isaac scoring model produces business credit scores ranging from 50 to 350. Credit providers usually consider a business credit score above 220 to be a good risk. They consider a score of less than 175 to be a high risk.

6. The overriding factor in business credit scoring is the credit history of the business owners or the key principals. In addition, there are other factors related to the owners'/principals' personal credit profiles used to score small business transactions

7. Business-related credit factors scored include: the company's time in business; company size; industry; form of company organization; history of paying bills on time; business net worth; average bank balances; ratio of debt service to cash flow; and recent judgments, bankruptcies or agency collections.

8. Many large lenders, such as Well Fargo Bank and Bank of America, have developed their own predictive business credit models. Several have even fine-tuned the Fair Isaac model to better meet their needs and preferences.

9. If your firm is rejected for credit based on a scoring model, ask the lender to explain the rejection. Some lenders will reconsider if requested, but may require additional credit information.

10. Some lenders have special pools for higher risk credits. They usually charge higher rates and offer terms that are less advantageous than for high-scoring transactions. Others may ask for credit enhancements to grant approval, such as additional collateral or outside guarantees.

11. Here are ten ways to improve business credit scores:

* Improve the credit habits and profiles of the key principals or business owners

* Pay all back taxes

* Settle outstanding liens and judgments

* Pay bills on time and be consistent with payments

* Eliminate supplier disputes by settling with any suppliers or former employees

* Sell or factor accounts receivable to improve cash flow

* Establish your firm's credit record by registering with the Secretary of State where your business is incorporated

* Try to improve individual and company credit for at least twelve months

* Buy from vendors who report activity to the major credit bureaus

* Set up automatic account debiting with creditors to help eliminate the possibility of paying slow

Credit scoring is not designed to predict individual loan performance with certainty. Rather, these systems do a great job of quantifying risks for groups of borrowers with similar characteristics. A disadvantage of credit scoring systems is that they are easy to misapply. If the lender's customers don't share characteristics and behavior patterns with the model's underlying base group of credits, then reminiscent of HAL, many transactions with great potential may be eliminated.

If your firm doesn't score well under a scoring model used by a major lender, you may face an uphill battle for credit approval. Some smaller credit providers try to differentiate themselves by not using scoring models. Instead, they actually listen to borrowers, sort out unusual circumstances and use old-fashion human judgment to make credit decisions. One of these lenders might make sense for your firm.

George Parker is a Director and Executive Vice President of Leasing Technologies International, Inc. ("LTI"). He is responsible for overseeing the company's marketing and financing efforts. One of the co-founders of LTI, Mr. Parker has been involved in secured lending and equipment financing for over twenty years. Mr. Parker is an industry leader, frequent panelist and author of several articles pertaining to equipment financing.

Headquartered in Wilton, CT, LTI is a leasing firm specializing nationally in direct equipment financing and vendor leasing programs for emerging growth and later-stage, venture capital backed companies. More information about LTI is available at http://www.ltileasing.com.

---

Factoring vs. Bank Loans

Is factoring a type of loan?No. Even though invoice factoring is commonly referred to as " factoring loans", it is a financial practice involving a B2B transaction, but no bank. To further explain,... Read More

Benefits of a Bad Credit Personal Loan

Outlined here are some of the many benefits of a Bad Credit Personal Loan. Bad credit personal loans are increasingly popular these days. A poor credit history can happen to anybody ? at... Read More

To Be Mr. and Mrs. Sometimes You Need Wedding Loans

The conception of wedding has changed over the years. Its conception, its configuration, the way it is planned ? all have changed through the past times. You can see it since you are... Read More

Finding the Bad Credit Personal Loans that You Need

It can seem impossible at times to get bad credit personal loans? every place that you go to apply for a loan turns you down without a second thought. You may feel frustrated,... Read More

How to Find a Cheap Debt Consolidation Loan

If you're shopping around for a cheap debt consolidation loan, then you're going to want to try to find the one that has the lowest interest rate that you can get. The interest... Read More

Why Choose a Bad Credit Personal Loan?

Listed below are some of the reasons for choosing a bad credit personal loan.A bad credit personal loan is a low cost loan secured on your home. It frees up the spare capital... Read More

The Best Day of The Week For Payday Loans

Whether your payday arrives every Friday or every other Friday, payday is definitely the highlight of the week. How to spend your payday depends on your goals. Are you a saver, or a... Read More

No Money Down Loans

You want to buy a home but you do not have money for a down payment or for closing costs? Well, just forget it. At least that is what you have probably been... Read More

Many People Have Realized the Convenience and Benefits of Online Personal Loans

The Internet has provided a whole new dimension to obtaining a personal loan. Before lending companies were available on the World Wide Web, people were limited with their loan options and from where... Read More

About Personal Loans

What are personal loans? They are unsecured loans that a borrower obtains for various purposes. This type of loan is often used to consolidate outstanding debt into one monthly payment, but it can... Read More

A Guide to Getting a Debt Consolidation Loan UK

If you're getting in over your head with credit, you might consider getting a debt consolidation loan UK . This loan is designed to pay off at least a portion if not all... Read More

Benefits of a Personal Secured Loan

A Personal secured loan can offer many benefits, some of which are listed below:Personal secured loans are loans that are offered to individuals rather than businesses.Rates for a personal secured loan will be... Read More

Money With The Click of a Mouse

Online payday loans seem to be popping up everywhere. A simple web search will positively crowd your screen with online payday loans sites hoping to get your business. Are online payday loans sites... Read More

Where to Get Your Military Signature Loan

Military signature loans are easy to come by. When looking for a military signature loan you might even get overwhelmed by what seems like an endless supply of lenders, APRs and added perks.... Read More

How To Apply For a Business Loan

Worried about how to apply for a business loan? Although it may seem like a daunting task at first, it can be made less so by careful preparation. When applying for a business... Read More

Education Loans Can Augment The Boundaries Of What You Can Achieve

Education never ends ? it is not said without reason. We are educated all our lives and getting an education not only is a great achievement but something that gives you the tools... Read More

Car Loans for People With Bad Credit

Car loans for people with bad credit are readily available online. After completing an online car loan application, you can expect an approval within a few minutes. By the next day, you can... Read More

Payday Loans: How They Really Work!

Payday loan companies gives the borrower the amount of the check minus their fee (They get their money up front).Fees charged for payday loans are usually a percentage of the face value of... Read More

Risk It With A Bridging Loan?

How many times have you been casually going about your business, seen a great property and thought, "that would be a really nice place to live"? Then you snap out of it, knowing... Read More

Shopping for a Personal Loan

Most Internet users are now extremely comfortable using the Internet to research and buy items that we need, mainly because we know that e-tailers probably have the lowest prices and we can avoid... Read More

Why Choose a Personal Secured Loan?

Listed below are some of the many reasons why choosing a personal secured loan makes good sense. Personal secured loans are also commonly known as a homeowner loan. This type of loan is... Read More

Zero Zero Financing on Automobiles in Retrospect

Some say that the automobile industry saved the economy during the last recession. This is because auto sales are bundled into retail sales, which allowed higher numbers than actual to be reported. Many... Read More

UK Student Loans Explained

Student loans seem to be the only feasible way out to pursue higher studies for the average student in UK. Things become all the more difficult for those without university funding. The government,... Read More

Bad Credit Personal Loans ? Pertinent Pedestal for a Financial Resumption

In the arena of loan borrowing, there is hardly an opponent more difficult to tackle than bad credit. Bad credit implies that your personal credit history is integral and decisive in making the... Read More

Bad, Credit, Student, Loans - Disjointed They Don?t Make Sense - Join Them and See the Possibilities

The day you stop learning is the day when you start decreasing your rewards. Learning is a constructive effort - who knows it better than student. A student is a 'learner' himself. There... Read More

A Guide to UK Secured Homeowner Loans

Trying to find good UK secured homeowner loans might seem difficult at first, but once you know what you're looking for and how to search for it then it's actually quite easy.The main... Read More

Poor Credit Car Loan - Get Approved Online

Poor credit doesn't have to stop you from getting a car loan. In fact, car loans are one way of rebuilding your credit history. Online car loan lenders make the application process quick... Read More

What is a Bad Credit Loan?

A Bad Credit loan is a personal loan for people with bad credit rating because a bad credit rating or credit history can make your life a misery. However created, your past record... Read More

Taking the Time to Find a Homeowner Loan UK

Trying to find a good homeowner loan UK can end up being quite confusing at first. The commercials and advertisements that you usually see for a homeowner loan UK use terms like "equity"... Read More