Credit Scoring for Leasing: How Leasing Models Differ from Bank Lending Models

This article examines how the application of credit-scoring models for leasing differs from models developed for bank lending. It argues that:

• Models for bank lending measure a client's likelihood to pay back a credit obligation.
• Models for standard equipment leasing:
  • Assess client-repayment risk;
  • They should also consider asset worth and vendor relationships as both affect the overall risk of a lease contract;
  • Expert models can automate an easy-to-use gap analysis of the difference between outstanding principle and market-resale value - this would facilitate a tighter control of risk-exposure for each leasing contract.

The paper:

• Lists the differences between lending and leasing models;
• Identifies the following three key risk areas for leasing transactions:
  • Client risk;
  • Vendor risk;
  • Asset resale risk.
• Explains how to build a scoring model for standard equipment leasing;
• Discusses gap analysis.

The paper concludes that:

• Scoring for standard equipment leasing differs from scoring for small business lending;
• Gap analysis is useful to measure principle at risk and decide how best to control it;
• User-friendly software can perform the scoring calculations and provide customer-facing staff with sophisticated, yet easy-to-use graphic analysis of the potential exposure of any deal.