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Credit Industry Practitioners See Credit Scores For Businesses As Inadequate

By Sally Maison
Published: Friday, March 12th, 2010

Credit scores have become a byword in the financial sector these days. Whenever anyone is talking about taking out a loan or applying for credit, the words “credit score” will inevitably crop up. While that may be true for individual consumers, the situation is not as clear cut for businesses – at least for a few major lending companies.

Credit Industry Practitioners See Credit Scores For Businesses As InadequateThe fact is that credit scores – while touted to be the ultimate metric on which lenders and creditors base their decisions for allowing loans and credit lines on – is not actually relied on that much in the industry. A lot of entrepreneurs carrying impressive credit scores are still meeting a lot of resistance in their applications for financing.

A few major lenders consider business credit scores to be an unreliable indicator on how well a borrower is at repaying debts. These lenders don’t limit their views to business credit scores either. These lenders also consider personal credit scores to be weak indicators as well. To be clear, not all major lenders share this view and a few of them still go by credit scores when deciding to approve a loan or credit application.

Bank of America Corp.’s commercial banking executive, Kathie Sowa is one practitioner in the industry who is skeptical about credit scores. “It’s a lagging indicator”, she says. According to the banking executive, Bank of America underwrites loan applications based on more traditional metrics. According to her, Bank of America, one of the biggest financial company in the country, prefers to consider “the full picture”.

A few of these traditional metrics which Bank of America prefers to base their credit and loan approvals on are cash flow and collateral. The bank considers these metrics to be a more reliable measure of the creditworthiness of a business, Sowa says.

Other experts however argue that, even if excellent business credit scores are not defining factors when applying for credit, it can still be a huge asset during the application process, helping the business start the process with the right foot forward – so to speak. Business should not take credit scores lightly and poor credit scores will most likely prove to be detrimental to their credit applications.

The problem with business credit scores is that the rules are not as clear cut as with personal credit scores. While the Federal Trade Commission provides comprehensive information for consumer credit reports, resources for business credit reports are not as abundant and, what resources there are carry a high number of inconsistencies and exceptions.

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