Nearly half of community banks use credit scoring to evaluate small-business loans, but most still give more weight to other criteria, such as cash flow and collateral.
In a survey the Small Business Administration's Office of Advocacy released Thursday, 47% of respondent banks said that they use credit scoring to assist in small-business lending decisions. Among the banks that used credit scoring, though, only 6.5% said it is the No. 1 factor in determining whether to approve a loan. In fact, most said it was the fourth- or fifth-biggest factor, behind cash flow, collateral, and the owner's net worth.
The survey was sent to about 1,500 banks, and 327 responded. The fact that 53% of the respondents said they did not use credit scoring when evaluating small-business loans suggests that "relationships continue to be the dominant factor in the lending decision," the authors wrote.
A previous relationship with an owner and the loan's purpose were listed as the most important factors in the lending decision.
The banks that did not use credit scoring cited a range of factors, including cost of implementation, customer resistance, and lack of confidence in scoring systems.
Credit scoring has long been used in consumer lending but it is a relatively new tool in business lending.
Among other important findings from the survey: The availability of credit scoring appears to be increasing borrowing opportunities for small-business owners; the vast majority of banks using credit scoring look at the owner's credit score, not the one for the business; and banks that use credit scoring tend to make more business loans than those that do not.
