Credit Scoring and the Availability, Price, and Risk of Small Business Credit

Allen N. Berger, W. Scott Frame, and Nathan H. Miller
Working Paper 2002-6
April 2002

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The authors examine the economic effects of small business credit scoring (SBCS) and find that it is associated with expanded quantities, higher average prices, and greater risk levels for small business credits under $100,000. These findings are consistent with a net increase in lending to relatively risky “marginal borrowers” who would otherwise not receive credit, but who would pay relatively high prices when they are funded. The authors also find that 1) bank-specific and industrywide learning curves are important; 2) SBCS effects differ for banks that adhere to “rules” versus “discretion” in using the technology; and 3) SBCS effects differ for slightly larger credits.

JEL classification: G21, G28, G34, L23

Key words: banks, credit scoring, small business, risk

The authors thank Bob Avery, Chris Cornwell, Bob Eisenbeis, Jill Richardson, Greg Udell, Larry Wall, Cordell Weiss, and seminar participants at the University of Georgia and the 2001 Credit Scoring and Credit Control meetings in Edinburgh, Scotland, for helpful comments and suggestions.

Please address questions regarding content to Allen N. Berger, Board of Governors of the Federal Reserve System, Mail Stop 153, 20th and C Streets N.W., Washington, D.C. 20551, 202-452-2903,; W. Scott Frame, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.W., Atlanta, GA 30303, 404-498-8783,; Nathan H. Miller, Board of Governors of the Federal Reserve System, Mail Stop 153, 20th and C Streets, N.W., Washington, D.C. 20551, 202-736-5543,