CREDIT SCORING SOFTWARE: A BRIEF LOOK For years, creditors--commercial and consumer alike--have used credit scoring systems to determine if potential customers are also potential risks. With increases in small business and middle-market commercial lending, it is no surprise that there is a surge of credit scoring products crowding the marketplace. As companies become more involved in complicated business decisions--ones that involve everything from assessing and managing risk to estimating the likelihood of delinquency--they are seeking products that will not only give them an edge on their competition, but also save their company financially and create an efficient flow of everyday business operation. With that in mind, think about the credit professional's daily routine of making decisions on the creditworthiness of their applicants. Scorecards that rate an applicant's suitability do not always reflect the much more needed and crucial data, such as information that may also be industry-specific. According to Jeff Brill, director of Predictive Scoring Services at Dun & Bradstreet, "a retailer might pay its apparel wholesaler before it pays its supplier of office products, while a manufacturer might be more likely to pay its raw materials suppliers before its trucking company bills. We created industry-specific scoring models, using actual receivables data from companies in the respective industry, to indicate how likely a company is to become delinquent on payments to suppliers in the user's own business." So how does a credit manager make a crucial decision based on a minimum number of attributes in a short period of time? That is a simple question, which unfortunately, does not have a simple answer. Today's products not only need preprocessing features, but also benefits that will help in monitoring data that could easily change. Today's managers are seeking complete, integrated model solutions that will do one thing--determine and improve the company's cash flow by use of accurate and detailed analysis. Types of Credit Scoring Tools When it comes to finding a credit scoring package, credit managers seek models that will enhance their business and help them to make a thorough decision. There are big names to choose from which include Credit and Management Systems, Inc., Dun and Bradstreet, Experian, Predictive Business Decisions Systems, Inc., SRR Solutions, and a host of other products offered by smaller scaled companies. Your business needs should be determined before investing in a package that may or may not be suitable for your size of business. There are three definitive types of scoring tools that will help determine what type of scoring model will best suit your credit department. â?¢ Predictive Scoring- Models that are used to predict a customer's ability to pay its bills. They are used before offering credit or to extend credit on an existing account. â?¢ Risk Scoring- Models that are used to predict if existing customers are likely candidates to pay or to extend their possible delinquency in paying. The primary goal is to analyze their collection potential. â?¢ Default Scoring- Models that predict whether a customer is a candidate for bankruptcy. These models give credit managers a basis for decisions, however, they are not the final word. A combination of these models can be devised or credit departments can create their own scorecards based on the variables they are looking for. In developing your own solution, identify key factors that your industry uses to make credit decisions. Follow-up by identifying sources of data and set up a database of internal data. Proceed to link the databases together. Whatever the basis of your credit scoring system, it should be a statistical program that compares the companies performance against businesses or customers with similar profiles. It should also award points for each factor that will help predict the likelihood of repaying any debt owed to your company. That is why it is extremely important that your customer is aware of the information submitted and that it is accurate and reflective of their business before a credit application is even considered. Test the model and evaluate the results. Continue testing and evaluating until your department is satisfied with the results. This can include factoring in ideas from your sales, credit and information technology staff. which could help make each department's job easier. As long as the model is based on real data and statistics, it will help you to treat your applicants objectively. Credit scoring has become increasingly popular during the past few years and will only continue to move forward as the new millennium approaches. The following companies offer scoring solutions that we think can help contribute to the consistency of your cash flow and revenue. But don't limit the possibilities to this list. Search for a product that will meet your company's needs. Take the time to research the industry in which you work. The ability to estimating risk is the only way to reduce it. You'll be surprised to find out that there are many ways and companies willing to help you devise a scorecard, but only you know your business and what it will take to get your customers to pay. Good luck! Credit & Management Systems, Inc. 49 Sherwood Terrace, Suite 49 E Lake Bluff, IL 60044 Phone: 847/735-9700 Fax: 847/735-9702 Website: http://www.ccmcms.com Product: The Corporate Credit Manager[TM] Overview: A PC-based customize credit management expert software system. It integrates company policies, procedures and objectives to provide intelligent support for day-to-day decisions. It exchanges information with in-house systems and outside information sources. It also interacts with your sales and marketing departments, and presents detailed reports and analysis designed to specifications. The software's main objective is to combine credit scoring with speed, accuracy and consistency. Product: Month End Reporter Overview: A new credit scoring tool that generates tabular and graphical reports. It identifies trends and opportunities within specific markets and establishes and maintains control and operating standards. The goal is to define and benchmark against industry standards. Dun & Bradstreet One Diamond Hill Road Murray Hill, NJ 07974-1218 Phone: 908/665.5000 Fax: 908/665.5803 Website: http://www.dnb.com Products: Commercial Credit Scoring Report, Industry-Specific Reports Overview: Dun & Bradstreet offers predictive scoring models, based on commercial and consumer bureau information, which help assess the probable future payment performance for more than 11 million businesses. By using advanced statistical techniques, hundreds of attributes are condensed into a single number indicating the likelihood that a company will become severely delinquent (defined as 90+ days past terms) in payment over the next 12 months. These scores indicate the firm's willingness to pay in a timely manner. The higher the score, the lower the risk of delinquency. Supporting the scores is a full range of up-to-date information including: percent of trade balances past due, accounts placed for collection, financial position, public filings, and demographic information such as years in business, number of employees, industry and sales volume. The scoring software generates a summary or detailed report on demand from either desktop or via fax. Experian 945 East Paces Ferry Road Suite 2600 Atlanta, GA 30326 Phone: 800/831-5614 Fax: 404/841-1458 Website: http://www.experian.com Product: Experian Credit Advisor Overview: This product summarizes critical information about a company so you can decide whether to do business with it. It assesses the business risk of lower-balance transactions and helps to determine whether you can confidently make a credit decision on your new customer or should spend time investigating them further. Experian business credit reports contain information about how a particular business has paid previous and existing credit obligations, indicates if there have been any previous or existing legal filings, and gives a background and history on the firm. These business credit reports are used to help a lender decide whether a company can take on additional financial obligations and, if so, whether it will pay those obligations on time.
Experian collects credit obligation information from thousands of businesses nationwide. These businesses are usually the suppliers with which a company has an existing financial relationship. The information comes directly from accounting systems of suppliers. Experian also collects legal filings from the various local. county and state courts across the United States. Company background information is collected from a variety of independent firms. Information is not obtained directly from a company about its business. Predictive Business Decision Systems, Inc. 106 Apple St., Suite 303 Tinton Falls, NJ 07724 Phone: 732/530-9303 Fax: 732/933-9267 Website: http://www.pbdsinc.com Product: New Application Scoring Model Overview: This model statistically evaluates future payment behavior of new applicants. These scoring models improve profitability by increasing the level of automation. Credit analysts intervention can be reduced on routine transactions by developing credit strategies to automatically approve low risk accounts. This allows credit analysis to focus their efforts on more difficult, higher risk applicants. The software looks to increase approval rates and/or decrease delinquency rates. It allows for improved efficiency. productivity and turnaround time by increasing automation and allowing the credit staff to make credit decisions more quickly and effectively. The decrease in credit decision turnaround time often can improve the overall application-booked rate. it also produces a higher quality, lower-risk portfolio by identifying low, medium and high risk applicants. This in turn gives an effective credit strategy and a more profitable portfolio. SRR Solutions Inc. 400 Blue Hill Drive Westwood, MA 02090 Phone: 781/326-3070 Fax: 781/326-7135 Website: http:/www.srr.com Product: The Corporate Credit Expert[TM] Overview: This product identifies potential areas of risk and opportunity through rules-based analysis which in turn produces written commentaries and system generated reports. Comparisons can be made to portfolios. peer groups or industry standards. It also provides a comprehensive. enterprise-wide credit management solution in which the credit professional has day-to-day operational, analytical and consultative tools. The product analyzes financial statement ratios and trends, textual expert commentary, customer comparisons to portfolio peer groups, a forecasting template and complete credit score results. This in turn provides better visibility and communication regarding customer accounts. It also acknowledges calculated risks associated with the entire credit portfolio due to consistent application of credit policy. The result--growth of a healthier customer base and better receivables management due to portfolio analysis and consulting services. ~~~~~~~~ By Karron T. Davis Karron T. Davis is the assistant editor of Business Credit.
