Getting 'yes' or 'no' a lot faster - computerized credit-scoring systems growing in commercial loan market

Nation's Business, July, 1995

A computerized credit-scoring system that speeds up the small-business loan-approval process is catching on rapidly among the nation's banks. And bankers who have tried it say credit scoring has the potential of increasing the number of loan approvals.

Here's how it works. The credit scoring system applies points to key pieces of financial data that bankers ask small-business borrowers to provide in loan applications, including outstanding debt, repayment history, assets, and credit bureau information. The points add up to a total score that presumably indicates whether a borrower is a good credit risk.

Unlike a more conventional loan-approval process, the scoring system relies heavily on a business owner's credit history rather than on an extensive analysis of a company's balance sheet.

If the borrower earns a passing score, the computer system recommends approval of the loan. A rejection is recommended if an applicant scores below passing. The whole process takes about 30 minutes. For those in the "gray area," the loan officer will take into account a visit to the borrower's company and other traditional credit-screening techniques.

Credit scoring is not a new practice. Bankers have been using it for several years to determine whether to approve consumer and home-equity loans. In addition, a handful of banks have used it for small-business loans.

"Sooner or later nearly all banks will be using credit scoring for small-business loans," says Sandra Maltby, senior vice president for small-business services at Key Corp., based in Cleveland.

Barnett Banks, which serves Florida and parts of Georgia, has had a computerized scoring system for about a year that has rated more than 5,000 small-business loan requests, says Steven Hickman, director of small-business banking. "We are pleased with how credit scoring ranks risk and provides us with an opportunity to respond to the small-business owner quicker," he says.

Before using credit scoring, Barnett approved 47 percent of new small-business loan requests; now it approves 60 percent. "Virtually all of the increase is due to credit scoring," Hickman says.

Helping to make credit scoring more available is new software. One product, similar to what was developed for Barnett Banks, is Score Card, marketed by Fair, Isaac & Co., a San Rafael, Calif., statistical-modeling firm. The scoring system is designed for loans of $250,000 or less. The software was developed in conjunction with Robert Morris Associates, a Philadelphia-based trade association made up of loan officers and credit-risk managers. Seventeen of the association's financial-institution members contributed data.

At least 40 banks are using or plan to use the Score Card system. These include Chemical Bank, based in New York; Key Corp., in Cleveland; and First National Bank, in Chicago.

For the borrower who isn't credit-worthy, the scoring system won't make much difference, notes Hickman. "It will be just as difficult for them to win a loan if they have had credit problems in the past."