Small Business Credit Scoring

[Name of the Institute]Abstract

Small businesses credits are majorly an ongoing problem with those manage small business. Institutions vary largely on the rules and strategies they use in providing small business credits. This study helps those who manage small business by analyzing the impact of credit ranking on the availability of the small business credit and also the price of the credit and the risk associated with it. The study is a qualitative analysis of 41 banks in U.S. and the loans provided for the time period 2009-2011. The study used linear multiple regression models and parameters are estimated through ordinary least square method. The study mainly focused on the usage of small business credits ranking by banks and its impact on the availability of small business credits and on the price of the credits with associated risk. The small businesses with different requirements are recommended to approach the banks that adopt the small business credit ranking in different ways. The banks and loans are divided in one category that purchases own credit ranking models, use 'discretion', must be approached by the business not ready to pay high price on business credits. The other category is the banks and loans that are given with terms set using small business credit ranking and allowed small business credit ranking to automatically accept or reject loans, use 'rules', must be approached by the businesses with large credit requirements and whose credit is risky. The way that small business can affect the credit ranking is left for further research.

Table of Content

Abstract1

Introduction3

Literature Review5

Data Sources8

Statistical Variables9

Methodology11

Limitations12

Results13

Recommendations17

Conclusion18

References21

Introduction

In recent years the U.S. commercial banking transformed by advances in financial engineering, telecommunications and information processing. This research paper focuses on small business credit ranking (SBCS) that is a technology with rapid spread that embodies the above mentioned advances. We specifically here will examine the effect on the quantity, premium and risk of small business credit (under $100,000). Following are the important implications of small business credit ranking.

The data used in this research paper is the survey data of large U.S. banks for the year 1995 to 1997. The data was collected to know that whether these banks use small business credit ranking or not, and if yes how they use small business credit ranking. Using this survey data, the effect on the quantity, premium and risk of credit by the use of small business credit ranking will be estimated. Pour measure here is the extent to which the institutions depend on rules more than do on the discretion in the implementation of the technology. By rules and discretion here we mean that how much a bank depend on credit scores produced externally when approve or reject and take price decisions. One other possibility is that the banks develop their own models and take credit decisions by using additional inputs. From the Terms of Bank Lending Survey we have used the risk ratings these banks issue for small business loans. The data on risk ratings and contract terms is ...