The Role of Credit Scoring in Small Business Lending
This paper discusses the role of credit scoring in small business lending, based upon evidence from survey in the United States and Japan. Credit scoring has the following four potential benefits in small business lending:
- Reducing screening and monitoring costs of small business loans;
- Enhancing competition among banks in local markets;
- Adjusting lending interest rates commensurate with borrowers' credit risks;
- Increasing the availability of credit for risky marginal firms.
The benefits actually realized depend on:
- Financial structure of individual country;
- Management strategies of banks adopting small business credit scoring.
The paper concludes by stating that a clear policy strategy is important in order to achieve the potential benefits of credit scoring.