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Beware New Small Business Credit Score System

Without warning, millions of small business owners seeking loans or other credit from banks, vendors, corporations, finance companies and trade creditors will now be subjected to a new automated business credit scoring system that aims to reduce lender risk and eliminate manual reviews of small business loan applications.  The new small business credit scoring system was developed by Equifax, a large global credit scoring company that has credit information on over 25 million small businesses.

In a nutshell, the new system takes more small business credit decisions out of human hands and turns them over to computers armed with vast quantities of data never before used for this purpose.  The new business risk assessment scores allow banks and other businesses to go well beyond traditional industry reports when deciding whether to approve a small business loan or not.    

BizBest inquiries have found that banks and other lenders aren’t satisfied with how small business credit scores are currently compiled and have been quietly working  with Equifax to develop a new, automated “early warning” scoring method that uses more data on each small business and new techniques to “predict” future changes of default.  Small business lenders themselves, through an industry association they’ve created called the Small Business Financial Exchange, are supplying new types of data that hasn’t been part of past scoring efforts.

According to Equifax documents, the new small business credit risk scores differ in four key ways from prior scoring systems:

  1. The new approach uses several different automated scoring systems that are built on pre-recession, recession and post-recession data. They represent a new type of business scoring that provides a more complete view of how a company meets its credit obligations during changing economic conditions.
  2. The new scoring system incorporates twice as many data attributes as other industry scores, including large and small business, public and private organization and time series variables.
  3. A new minimum scoring standard and threshold will be used to validate the legitimacy of a small business and verify information supplied on the credit application errors, omissions or inconsistencies.
  4. The new small business credit “scorecards” will be applied automatically based on business size. This is basically meant to encourage banks, lenders and other creditors to skip using other scoring systems and stick with this one alone. 

This is not an experiment, trial or proposal. The new scoring methods are already in play. Specifically, Equifax is providing the following to lenders:

  • The Business Delinquency Score, which predicts the likelihood of severe delinquency on an account, and;
  • The Business Delinquency Financial Score, which determines the likelihood of severe delinquency on financial accounts.
  • A next-generation Business Failure Score, which incorporates many of the same data elements as the delinquency scores – enhancing its ability to predict the likelihood of business failure within the next 12 months.

And here’s something else business owners should know:  Both of these new credit scoring products give lenders the additional choice of obtaining credit information on the business owner and other officers and principals, along with credit information on the business itself.  Equifax says it plans to introduce other scoring changes and enhancements throughout the year.

The inability of banks and other lenders to anticipate how a small business might fare under changing economic conditions in the future has been a driving force behind the new scoring system.  Burned by defaults in the “Great Recession,” creditors are seeking a new crystal ball to help them tag businesses that – although faring well now – might stumble if marketing conditions change.

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