Aug 6, 2012 0
There are a few factors used in evaluating the credit risk of small businesses, and it is crucial that small business owners know these factors.
Understanding what these factors are will lead to a greater chance of securing credit. These factors have been determined as a result of a two-year study with more than 400,000 participating businesses conducted by Experian. The factors are: how well the business is managed, whether derogatory accounts are present, the target market, and, although not explicitly stated, a personal guarantee.
*Business management and derogatory accounts:
These two factors seem to coincide with one another. According to the study conducted by Experian, a well-managed business was one that suffered no or very few derogatory accounts, delinquencies, bankruptcies, tax liens, judgments, etc. These factors are all contribute to Small Business Credit Scoring (SBCS), which is a technique used by nearly 90 percent of all small business lenders.
Like other credit scoring, SBCS does not eliminate risk. A SBCS does show indicators that make the potential for loss more predictable.
When recognizing the probability that a business will default, lenders are armed with the ability to continue to reduce the risk of potential loss. If a business has little history with borrowing, a strong outline in the management structure and projections of the company in the near future will be a close substitute for the preceding factors, but is not a guarantee.