Lending By The Numbers

Credit-review software is coolly objective. How will you fare?

The night before she was due to receive a crucial loan for her growing business, Bonita Schwartz got a baffling inquiry from her banker. "He calls me at home and says, `I just want to make sure--you got that business in a divorce?"' she recalls him asking. In fact, she had started the business herself as a single woman, which, she says, he knew. Schwartz took the remark as a put-down, the implication being that she couldn't have started the business on her own. "If I were a man he'd never say such a thing to me," she says. The next day, Schwartz, the owner of a 12-person opinion-research firm, was told she wouldn't get the loan--but not why. Rather than appeal the decision, she moved on to "find myself a different kind of bank."

It turned out to be very different. Not only were there no intrusive phone calls but this bank also relied on an entirely different kind of application process, known as credit scoring. In the end, she got a $450,000 loan that enabled Schwartz Research Services Inc. to buIld its new Tampa headquarters. Rather than reviewing her business plan, making onsite visits to the company, and looking over years of audited cash-flow statements, the bank used a computerized program to make the decision. Schwartz filled out a simple application form, and the computer toted up pluses and minuses to gauge the risk, weighing such factors as her years in business and promptness in paying bills. Then, it calculated a three-digit score. "It no longer mattered whether I was a man or a woman. What mattered now was that Iworked hard and my credit was good," says Schwartz.

FAST LANE. Looking for a small-business loan? Chances are, if you approach a major national bank these days, or even a big nonbank lender, you too will be judged by the numbers. The computerized process of credit scoring has expanded the pool of small-business lenders by making it profitable for them to make loans under $500,000. Credit scoring reduces the processing costs and screens out bad risks for the big banks, enabling them to offer lower interest rates to borrowers with good scores and higher rates to those with less-sterling scores. Twenty-three of the top 25 small-business lenders--mostly major banks--use credit scoring, according to Fair Isaac & Co. of San Rafael, Calif., the leading provider of credit-scoring software. The process originated in the early '90s to evaluate business-credit requests and began to spread among big lenders about three years ago. Most likely, you'll never hear the term credit scoring at all, but the tip-off will be shorter application and loan-processing time.

How do you know if credit scoring will be helpful to you? Certainly, many people who can't get bank loans benefit from this by-the-numbers approach because it gives more weight to personal credit history than do traditional lending policies, proponents say. But its cold-blooded objectivity is not for everyone. While the computer program doesn't consider race or gender, reducing the possibility of discrimination by lenders, it also won't cut you any slack for your ability to rise above personal tragedy, such as an illness that has bankrupted your family; nor will it consider such subjective aspects of your character as your deep roots in the community, as a neighborhood banker might. And startups and companies with unstable cash flows will still have trouble getting loans under credit scoring, just as they do with traditional bankers.

One of the biggest proponents of credit scoring is Wells Fargo & Co., the giant San Francisco-based lender, which expects to make over $3.5 billion in small-business loans this year. Based on credit scores, the bank sends small businesses notices for prequalified credit lines, similar to the notices sent out by consumer credit-card issuers. Customers can then send in the one-page application by fax or mail or call Wells Fargo's toll-free number. The average loan is a $30,000 credit line, and the borrower generally gets an answer within about 10 days. The borrower never even has to step into a bank branch. "We're not forcing a relationship on the customer," says Terri A. Dial, vice-chairman of Wells Fargo. The interest rate on these loans runs from prime rate plus 1.75 percentage points up to 8.75 points above prime.

For Jay Gernsbacher, a partner in the six-person New Orleans-based company Center Staging, which erects concert stages, credit scoring saved a lot of money. He was about to opt for a leasing deal for a new aluminum outdoor concert roof system at an interest rate of more than 20%. But then, Hibernia National Bank, a $12 billion bank in New Orleans, which uses credit scoring, offered Gernsbacher a $50,000 loan at 12% interest for the first eight months and 12.5% thereafter--based on the personal credit histories of Gernsbacher and his partner, as well as their businesses' credit record. "I filled out what looked like a credit-card application, and they called the next day and said, `Come get your money."'

The computerized process helps make such quick turnarounds possible. An experienced banker takes about 12.5 hours to evaluate a typical small-business loan application, but credit scoring can be done by a clerk in a mere 15 minutes, according to Latimer Asch, vice-president for commercial markets at Fair Isaac.

How do you know if you're a good candidate for credit scoring? If you've been in business for a short time, your chances of getting a loan are poor (table). "We've found the riskiest businesses you can lend to are the ones in the first couple of years of their lives," says Robert M. Kottler, senior vice-president and manager of small-business banking at Hibernia. Also, if you're habitually late paying the office rent or carrying too much personal and business credit, your score will suffer. But you'll get positive points for a lengthy borrowing history with no late payments, and a good steady track record in business and homeownership. Banks are loath to discuss a specific passing grade, and different banks take different factors into account. But if you're in an industry, such as the restaurant business, where cash flow is unpredictable, you're as likely to be rejected by credit scoring as by a traditional loan review.

Granted, some small-business owners still intentionally seek out their friendly local bankers, believing that a computerized score won't tell the whole story. Robin Hunt, CEO and owner of H&W Plastics Inc., an automotive-parts company in Bowling Green, Ky., likes to "sit down face-to-face with the president of a bank and tell them they have to bank on our future, not our past." She borrowed $300,000 through a conventional bank loan, securing it with liens on her capital equipment.

"WE CHARGE MORE." One reason smaller banks still don't credit-score is that it requires a major investment in software and hardware. Also, some bankers say their human touch can be a competitive advantage. "We know our customers," says Lee B. Murphey, executive vice-president and chief credit officer at First Liberty Bank in Macon, Ga., which has $1.5 billion in assets. "We offer direct contact with decision-makers, whereas if you call 1 800-CREDITSCORE, you don't have that." The downside, Murphey concedes, is "we charge more."

If you have decided to seek a loan from a major bank that credit-scores, three factors are key to improving your tally, suggests David R. Evanson, author of Where To Go When the Bank Says No (Bloomberg Press, 1998): Avoid applying for too many business and personal credit cards, don't jump from bank to bank, and always pay your company's rent on time. In addition, the nonprofit organization Debt Counselors of America recommends on its Web site (www.dca.org) that you clean up your personal credit reports from Equifax, Experian, and Trans Union. That lengthy process involves requesting your credit report, reviewing it for errors and out-of-date information, and making sure the necessary corrections are made. If your application is rejected, you can request a personal review. Most banks that use credit scoring say their lending officers will give weight to extenuating circumstances if an applicant scores too low to get a loan, though critics say this is seldom the case.

It's true you won't get a warm, fuzzy feeling when a computer makes the decision. But if speedy loan approval and lower rates are what you're after, it pays to know how to score.

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