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SMB Lending: Qualitative Risk Factors for Small and Mid-Size Businesses
Question: What qualitative risk factors should lending officers consider in small and mid-size business (SMB) lending decisions?
Answer: Many banks base their small and mid-size business (SMB) lending decisions on quantitative credit scoring methods and models. Quantitative credit scoring is an efficient means to evaluate borrower’s credit worthiness and to effectively price credit products. It provides effective predictive metrics of a borrower’s future ability to meet debt obligations based on past experience.
However, product markets and a company’s financial health can change direction seemingly overnight. Rapid changes in technology, capital market shifts and geo political and demographic risk factors are heightened and accelerated in today’s global economy. Small and mid-size businesses are dramatically impacted by these risk factors and commercial lenders should consider how well an SMB is prepared to meet these mounting challenges. That is why bankers need to consider qualitative business risk factors in the credit decisioning process for SMBs.
An effective qualitative risk assessment program targets three critical aspects of the SMB business enterprise. Those three business aspects are:
- Company’s Product and Market Dynamics
- A Risk Assessment of Business Functions
- Review of Critical Success Factors
Managers and owners of SMBs must demonstrate to their banker how they have assessed these risks in their franchise. They must also articulate to lenders how their governance structure manages these risks and how their business plan will leverage capital to transform these risks into opportunities for growth and profitability. Commercial lenders can feel safe in the assurance that owners and managers who can answer to these questions are the type of client the bank wants as customers.
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First published on BankersOnline.com 3/31/08
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