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
ship’s mission. HAL operated flawlessly until it reported
failed operation of a ship system that was operating perfectly. Rather than correct
mistake, HAL’s logic dictated that it would be more efficient to kill
ship’s crew. Ever
polite computer, HAL killed quickly and quietly until it was unplugged by
sole remaining crewmember, Dave Bowman.Many small business owners believe that HAL’s progeny are carrying out HAL’s murderous mission in
small business credit arena. Computers now make important credit decisions for major banks and financing companies. Each day in
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
decision by computer-generated rejection letters.
By gaining a better understanding of
credit scoring process, you may be able to help your firm maneuver in
new world of credit scoring. Here are some key points about business credit scoring worth noting:
1. Credit scoring automates
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
1980s. They determined that
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
credit history of
business owners or
key principals. In addition, there are other factors related to
owners’/principals’ personal credit profiles used to score small business transactions