A recent study released by the Office of Advocacy of the U.S. Small Business Administration showed that the use of credit scoring by banks for small business loans may increase small businesses’ access to credit. The report also found that relationships continue to be the dominant factor in a bank’s decision to lend to a small business. “The use of credit scoring can lead to risk-based pricing of loans which ‘democratizes’ lending, meaning that riskier loans can now be made to start-ups or small business owners with little credit history,” said Dr. Chad Moutray, Chief Economist for the Office of Advocacy. The study also shows that banks, especially those in urban areas, are moving towards the use of both owner and business credit scoring as a key measurement in the small business loan decision. Banks that have adopted credit scoring rely more heavily on small business and micro-business loans in their total lending portfolio after using credit scoring in the lending decision. Still, the study found that only 47% of banks surveyed use a form of credit scoring for small business lending. The study is titled “A Survey Based Assessment of Financial Institution Use of Credit Scoring for Small Business Lending.” A full copy is available through the Office of Advocacy.

Source: Jacob Barron, NACM Staff Writer and The Office of Advocacy of the U.S. Small Business AdministrationThe article was provided courtesy of FCIB.   www.fcibglobal.com

BIIA Newsletter January – 2007 Issue