They compare poorly to established businesses in collateral and repayment. How credit scoring works Credit scoring uses a mathematical model to sift a loan applicant's credit history and compare it to thousands of previous loans. The result is a score that predicts the likelihood that the borrower will repay the loan. The higher the score, the better the risk looks to the lender. The scores can be quickly generated by computer, vastly speeding up loan processing.
Most financial institutions use a cut-off score to rate their loans.
Pacek said credit scoring could also represent a problem in a long-term lending relationship. If the business has a line of credit with the bank, and the bank is trying to lower its risk level in its overall portfolio, the bank may not renew the line of credit. That's why many banks lean less heavily on credit scoring for business. For start-ups, there's not that much information. Take the Internet companies.