Abstract: Small-business lending has been hot for some time, but a new trend has the potential to revolutionize the business. A handful of large banks have begun applying consumer-lending techniques to small-business lending. They're using direct mail and telemarketing to reach prospects--lumber yards, electricians, hairdressers, retailers--with a streamlined application for a line of credit. They then use computer-based scoring and predictive-modeling systems to evaluate the resulting inflow of applications. Bankers say the lines offered typically range from $25,000 to $50,000. They are made available with little or no documentation required. The approach is aggressive and innovative. Is it also crazy? You be the judge. The programs do have some good points beyond their obvious business potential. Most surveys of small-business owners, for example, point out the difficulty of getting bank credit. Mass-marketed credit lines are a plus on that count. Used for sound purposes, such funds could be a boon to economic growth. Also, in contrast to the higher cost of loans to so-called B and C customers (see cover story), the pricing for these new lines appears to be preferential, according to bankers' reports. Thus, for many borrowers, this latest loan blitz could be a plus. For the lenders involved, particularly the early ones into the market, the business potential is enormous, which is why you'll likely see one after another of the big banks jump in. Nevertheless, the trend raises several troubling questions. First: Will the computer models used for scoring/underwriting prove sufficiently rigorous for business loans? Models have long been used on the consumer side, with mostly acceptable results, but the current run-up in credit-card delinquencies, occurring in an essentially healthy economic period, gives one pause about heavy reliance on models for credits that are more complex than cards. At a recent press gathering, Richard Kovacevich, CEO of Norwest Corp., said that it's unlikely that the first extensive use of predictive modeling and computer scoring in the small-business arena will be the correct one. I think there will be some major losses, he said. Look at the low-doc, no-doc mortgages that were made. They were okay until there was a downturn, then people stopped making them. Second: Many people use multiple credit cards to finance fledgling or marginal business ventures, which can result in hefty card balances. Personal bankruptcies are soaring to record levels right now. …
Publication Year: 1996
Publication Date: 1996-08-01
Language: en
Type: article
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