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.
This RSS feed URL is deprecated, please update. New URLs can be found in the footers at https://news.google.com/news
Court allows Obama-era student loan rules to take effect, delivering defeat to DeVos - Washington Post
Car Loans - Shop Around, Compare Offers, and Watch The Small Print
Getting a loan to buy your new car is, you would probably think, straightforward. However, there are a few apparently small variations which can be actually cost you a lot of money.
Guide to Personal Loans
Here is a useful guide to Personal loans. What is a personal loan? A personal loan is money lent to an individual by a financial institution for a specific personal purpose.
Instant Car Loan - Get an Approval Online Quick
Your car loan is now less than an hour away from approval with an online car loan lender. You can have a check in hand to buy a car the next day once your online application is approved.
If You're Looking To Borrow Larger Sums of Cash a Home Equity Loan Could Prove Ideal
There are a number of different loan products available today, and the one that you select will depend upon your circumstance and budget as well as on the amount of cash that you need to borrow. If you are a homeowner and you're looking to borrow a fairly substantial sum of money at a low rate of interest, you may find that a home equity loan will prove ideal for your needs.
Be Wary of Guaranteeing a Loan
You need to be wary of guaranteeing a loan. What would you do if a friend or relative asked you to guarantee a loan? You would probably like to help them by agreeing to guarantee the loan but consider your actions carefully first and make sure you understand what it involves.
Secured Personal Loans - What You Need To Know About
Loans that are secured against property are called secured personal loans. They are suitable for when you are having difficulties getting an unsecured personal loan, are trying to raise a large amount, or you just have a bad/poor credit history.
Understanding Personal Loans, Cash Advances and Payday Loans
Have you ever been short on cash? Has an unforeseen event emptied out your wallet? Are you short on funds in-between paychecks? I am sure that many of you have found yourselves in this situation before. Don't want to borrow money from a friend or family member because you don't want them knowing your business? Now you don't have too.
Payday loan: A Complete overview
From different surveys, it is seen that the number of customers taking payday loan as well as payday lending companies are increasing frequently. If you are a person taking the payday loan for the first time or want to gather information regarding payday loan, then this article will be of great help to you.
Guide to Personal Secured Loans
Here is a useful guide to personal secured loans. A personal secured loan is the generic term for a loan.
Why Student Loans are Better Than Credit Cards
You need some more money for college expenses this semester. Do you whip out a credit card to pay for your books, or do you apply for a federal or private loan? Well, consider the options --With a federal loan, your interest rate will be low (around 5%) and your payments will be deferred until 6-9 months after graduation.
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 personal loan available for you.
Seven Tips For Credit-Enhancing Your Business Loan
What are the avenues available to businesses with weak credit profiles or to companies pursuing credit transactions that are perceived as too risky by credit providers? Many companies apply for credit at banks, finance companies or equipment leasing firms and are routinely rejected due to the high degree of perceived credit risks. When approaching a credit provider, it is helpful to understand what can be done to reduce the risk of a credit transaction in the eyes of the provider.
Fast Payday Cash Loans
Do you need fast cash to get your car fixed so you can drive it to work tomorrow? Is that computer you want on sale till Friday, but you're $100 short - and payday is Tuesday? If you need cash for something NOW and know that you'll be able to repay it in full on your next payday, then a payday cash loan may be just what you need to get you through.What are payday cash loans?Payday cash loans are one of the fastest growing segments of the financial industry.
SBA Loan: Options, Benefits, and Lenders Part 2 of 2
In this second installment, we will further examine what kinds of SBA loan options are available, and for what kinds of businesses they are most advantageous. We will also discuss the different types of SBA lenders.
What is Credit?
Ever wondered what is credit? Credit is more than just a plastic card you use to buy things - it is your financial trustworthiness. Good credit means that your history of payments, employment and salary make you a good candidate for a loan, and creditors - those who lend money or services - will be more willing to work with you.
A Guide to Finding Cheap Loans
Finding cheap loans isn't always easy? it seems like every time you turn around new rates and fees are added and the loan process becomes increasingly frustrating with each new change that's made.Cheap loans don't have to be such a hassle, however? there are a variety of loan options available for people of all credit levels that allow you to get the money that you need without paying extremely bloated fees and interest rates.
High Risk Personal Loans - Revive Frustrated Loan Hunting Attempts with High Risk Loans
Bad credit seems like an unfinished business, you can't shake it off, and you can't move on without putting it away. Unfinished business is meant to be finished.
Steps You Can Take To Protect Your Financial Information and Personal Identity From Fraud
Financial fraud and identity fraud are one of the fasted growing forms of fraud. The first line of defense to protecting yourself begins with you.
Hidden Bank Loan Charges That Would Make a Pick-Pocket Envious
There can be more to a bank business loan than making interest and principal payments. Your firm may get a great rate on its new credit line or term loan but you may cry on the way home when you discover the hidden fees and charges.
Top 10 Ways to Avoid Loan Fraud
Every year, misinformed homebuyers, often first-time purchasers or seniors, become victims of predatory lending or loan fraud. Below you'll find the top ten ways to avoid becoming a victim yourself.
|home | site map|
|TIGER MEDIA© 2006|