A Survey Based Assessment of Financial Institution Use of Credit 

Scoring for Small Business Lending

Charles D. Cowan, Analytic Focus, LLC, Birmingham, AL 35203; 

Adrian M. Cowan, St. Mary’s University, San Antonio, TX 78228;

2006. [62] pages. Under contract SBAH-04-Q-002

This report was developed under a contract with the Small Business Administration, Office of Advocacy, and contains information

and analysis that was reviewed and edited by officials of the Office of Advocacy. However, the final conclusions of the report do not 

necessarily reflect the views of the Office of Advocacy.

Whereas the use of credit scoring for consumer loans 

has been commonplace in banks for quite some time, 

the use of credit scoring for small business loans is 

a more recent phenomenon. The study attempts to 

answer several questions related to the use of credit 

scoring in small business lending as follows:

• How have banks incorporated credit scoring in 

their small business lending operations?

• How does credit scoring influence the availability of credit to small businesses?

• What factors predict the likelihood of the use of 

small business credit scoring by banks?

Three basic investigations were conducted for this 

research. The study investigated the use of credit 

scoring within banks. The study estimated how 

small business lending and micro business lending 

was impacted by the adoption of credit scoring by 

banks. Finally, the study investigated the factors that 

affected the likelihood that a bank would use credit 

scoring for small business loans.

Overall Findings

While credit scoring has yet to become a primary 

instrument in loan underwriting for a majority of 

banks in the United States, there are indications that 

credit scoring may be providing more borrowing 

opportunities to small businesses. Although it does 

not appear that there is geographic expansion resulting from credit scoring, it does appear that there are 

significant increases in the importance of small business and micro business loans in the total lending 

portfolio subsequent to the adoption of credit scoring.

Highlights

The survey confirms that banks implement the use of 

credit scoring for small business loans in a number 

of different ways—while a majority of banks depend 

on the credit score of the owner as the key credit 

metric, other banks utilize the business score, and 

still others use both. 

• Relationships continue to be the dominant factor in the lending decision to small businesses. When 

credit scoring was compared with relationships and 

loan purpose for the credit decision, relationships 

and loan purpose were considered more important 

than credit scoring regardless of whether a bank used 

credit scoring or not.

• The principal alternative use of credit scores 

after loan underwriting is for the periodic reevaluation of existing loans. Loan monitoring is the next 

most cited use of small business credit scores. Banks 

generally perceive an improvement in the credit 

decision subsequent to the incorporation of credit 

scoring for small business loans.

• Geographic expansion does not appear to result 

from the adoption of credit scoring by banks.

• The adoption of credit scoring for small business lending by banks appears to be based on the 

operational thrust of the bank. Those banks with the 

larger proportion of total loans relative to total assets 

tend to be more likely to adopt credit scoring.

• Banks increase their investment in small business loans relative to total loans over time subsequent to the adoption of small business credit scoring.

• Banks with lower ratios of small business loans 

to total loans tend to adopt credit scoring for small 

business loans. Similarly, banks with lower ratios 

November 2006 No. 283
of microbusiness loans to total loans tend to adopt 

credit scoring for small business loans.

• A bank’s investment in small business loans 

under $100,000 relative to total loans tends to 

increase with the age of the bank.

• Rural banks are less likely to use credit scoring for small business loans as compared with their 

urban counterparts. 

• Credit scoring appears to be part of a bank’s 

competitive strategy, with those banks with larger 

investments in lending overall having a greater tendency to adopt credit scoring.

Scope and Methodology

Survey methods were used to investigate small business credit scoring in banks. A detailed questionnaire 

was prepared and approved for use by the Small 

Business Administration. The Office of Management 

and Budget approved the questionnaire and general 

survey design (OMB control no. 32450354). Using 

the June 2004 Call Reports, a sample was drawn 

from all banks reporting lending to small businesses. 

A stratified sample of 1,500 banks was drawn that 

was specifically designed for projectability to the 

population of banks. The sample included a diverse 

cross section of large corporate banks to small community banks throughout the nation. The senior 

credit officer in each bank was asked to complete 

a survey and return the survey either over fax or email. Each bank was contacted a minimum of two 

times with telephone calls to encourage a response 

to the survey. A total of 327 banks responded to the 

survey. The responses were then analyzed to ascertain the degree to which credit scores are currently 

being used in banks when making credit decisions 

for small business loans. 

The determinants of small business lending were 

next analyzed to understand what characteristics of 

banks lead to investments in small business loans. 

The data included the survey responses and the June 

2005 call report data for each bank in the survey. 

Two separate ordinary least squares (OLS) regressions were run that differed primarily by their dependent variable. The dependent variable in the first was 

the ratio of micro small business loans (loans under 

$100,000) relative to total loans. The second dependent variable was the ratio of all small business loans 

regardless of size to total loans. Two independent 

variables were used in each regression to capture 

the impact of credit scoring on small business lending. The first was a dummy indicator variable that 

indicated whether the bank used credit scoring. The 

second independent variable designed to capture the 

impact of credit scoring was time since adoption. 

This variable measured the number of years the bank 

had been using credit scoring for small business 

lending. Other independent variables were primarily selected based on use in the previous literature. 

These variables included the natural log of assets, the 

ratio of total loans to total assets, the ratio of property, plant, and equipment to total assets, the ratio of 

chargeoffs to total industrial and commercial loans, 

and the age of the bank in years. The independent 

variables were consistent across the two OLS regressions, with the exception of a final independent variable, the ratio of micro business loans to total small 

business loans. This independent variable was only 

included in the second regression that used the ratio 

of small business loans to total loans as the dependent variable.

The likelihood of banks adopting credit scoring 

was investigated using a logistic regression. The 

dependent variable was the dummy variable indicating whether a bank used credit scoring in small 

business lending. The independent variables used in 

the OLS regressions were also used in the logistic 

regression. In addition, a variable was added for the 

ratio of farm loans to total loans. This variable was 

designed to capture any differences between rural 

lenders and urban lenders. 

This report was peer reviewed consistent with 

the Office of Advocacy’s data quality guidelines. 

More information on this process can be obtained 

by contacting the director of economic research at 

advocacy@sba.gov or (202) 205-6533.

Ordering Information

The full text of this report and summaries of other 

studies performed under contract with the U.S. Small 

Business Administration’s Office of Advocacy are 

available on the Internet at www.sba.gov/advo/research. 

Copies are available for purchase from:

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