Some see it as the Holy Grail of small-business lending, while others say it is a sacrilege against the ideal of relationship banking.

Whatever their views, it cannot be denied that credit scoring is one tool bankers across the nation are hoping will make their loan underwriting process more efficient.

But a focus on efficiency fails to recognize the other benefits scoring brings to a bank, said Latimer Asch, manager of commercial products at San Rafael, Calif.-based Fair, Isaac & Co., a provider of decision-making technology.

"I think the degree of management control that you get, the assurance of compliance, and the ability to increase your approval ratio without increasing your loss exposure are three of the most important arguments for going with a credit scoring system," he said.

By quantifying the credit decision, a scoring system eliminates the element of human judgment, making it easier for management to change its credit standards quickly. And because the system treats every applicant the same, compliance concerns can be abated.

"You can guarantee everyone is treated exactly the same, and that no illegal or questionable practices can be integrated into the credit scoring process," he said.

Another advantage is that the system allows a bank to boost its approval rating without a corresponding percentage increase in loan losses. In fact, a 1994 study prepared by Washington-based Business Banking Board suggested that a scoring system helped some top- performing banks raise their approval rates as much as 30% without hurting the quality of their portfolios.

Still, most bankers look at more than just a credit score when they make their loan decisions. Martha Hayes, manager of small-business lending with First Union National Bank of North Carolina in Charlotte, said balances and other relationships with the bank are important considerations not included in the score. Scorecards only indicate a willingness to pay, she said, but say nothing about the capacity to pay.

Nonetheless, she said First Union uses scorecards on loans up to $250,000 to speed the decision process.

"It can quickly tell you if you don't want to do this deal," she said.

Right now, the market for small-business credit scoring systems is dominated by three big vendors: Dun & Bradstreet Information Services, Fair Isaac and TRW Business Credit Services. Each has different strengths, depending on their historic emphasis.

For instance, Karen Hartwyck, marketing director of D&B's Predictive Scoring Services, said her company's history in providing information on thousands of companies gives its a leg up in commercial information. To compliment this, the company has teamed up with Atlanta-based Equifax Inc. to use its 200 million consumer files for information on business principals.

"When commercial information is not available on a company through our files, Equifax applies our credit scoring model to its consumer information," she said. As a result, "we have developed a model that's predictive of how an individual will pay as a small business."

TRW, on the other hand, is considered strong when it comes to consumer credit information. Its Intelliscore product takes the credit information on the business and its proprietors and gives one score for the overall business risk.

According to one banker, the company is ahead of its competitors in this area. "They do a better job of merging consumer characteristics with the commercial characteristics of a borrower," the banker said.

Unlike other providers, Fair Isaac does not operate data bases with the credit files. Instead, its long established niche has been in creating models that take a comprehensive look at application information, company financial statements, financial condition of the principals, and credit reports on both the company and its owners.

"We're looking for predictive power here, so if you don't explore every available source of available data, you leave some predictive power on the table which can expose you to incremental losses," he said.

Fair Isaac has three small-business scorecards: one for loans greater than $35,000, and two for less than $25,000. The difference between the two smaller scorecards is that one incorporates financial statements. Prices for its services are volume-based, beginning at $6,000 a year. A typical customer may spend $20,000 to $25,000 a year on scorecards.

Earlier this year, it began offering a scorecard compiled with the assistance of Robert Morris Associates. The Small Business Scoring Service has been installed at 60 banks to date.

Despite their benefits, First Union's Ms. Hayes warns bankers not to pin all their hopes on these systems.

"I think there are a group of people out there who believe just using credit scoring will get them all these efficiencies," she said. "I think there is more to it than just using scorecarding."

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