This heterogeneity, together with widely varying uses of the borrowed funds, has made it difficult to develop general standards for assessing small business loan applications and has made evaluating such loans relatively expensive. Small business owners must contend with lenders with varying underwriting standards, varying appetites for risk, and varying expected rates of return for loans they may approve. The vagaries of local economies may also influence the likelihood that a small firm gets approved for credit. The reason for denial may bear no relationship to the financial condition of the business, the level of reserves, or other financial characteristics of the business itself, but be based only on the conditions present in the local economy. While small firms are faced with many impediments in gaining access to credit, new technologies, such as credit scoring, offer the promise of breaking down some of those barriers.
Credit scoring increases the consistency, speed, and often the accuracy of credit evaluations.
It also lowers the cost of gathering relevant information. Moreover, credit scoring uses automated systems and loan decisions can be rendered in minutes or hours rather than in days and weeks. However, bank regulators must continue to ensure that the bank's credit scoring models are accurate and nondiscriminatory. While there are already rich sources of data provided by lenders meeting their CRA requirements and by national surveys of small business finances, one point of this conference is to focus on information needs. For example, there is little information about the incidence of loan denials and the profile of the credit-constrained firms, especially those owned by women and minorities.