Big Bank Credit Scores – Impact on Business Growth Today.
A recent CBS News story featured the negative impact of “big bank” credit scoring procedures on business owners. We would expect this to be a feel-good piece on how small businesses play a leading role in job creation. It told how Lisa Whiting, a Wisconsin entrepreneur, started a business using her personal savings, credit cards and a County loan program that was available for businesses hiring special needs workers. Through hard work and careful business management, Ms. Whiting was able to grow the business and by 2009, she had 36 employees. Orders were rolling in and Ms. Whiting went to the bank to secure a loan to buy the additional equipment to enable the growth to continue – believing that she would be increasing her staff to 50 workers by the end of 2012. That’s when she hit a brick wall. Ms. Whiting discovered that her Credit Score had dropped from 809 to 544 and that her “big bank” was not willing to lend her the money.
How did this happen? Ms Whiting had used several credit cards as part of her start-up funding. She had an on-time payment history, but stayed near her borrowing limit on those cards. This raises a red flag that can negatively impact a Credit Score. During the financial crisis, her bank had (with no warning) dropped the limit on some of her cards. This credit limit drop raised a red-flag that negatively impacted her Credit Score. The resulting drop in her Credit Score raised a red flag that caused the bank to again lower her credit limit - which of course again negatively impacted her Credit Score. And it was as a result of her low Credit Score, that she was refused the loan to expand the business.
CBS News asked Marilyn Landis, the CEO of Basic Business Concepts to explain the big bank’s actions. She noted that Banks had always viewed loan “risks” as a way of anticipating where they could be faced with a loan default. This used to be done with local bank officers, but big banks had eventually turned the risk review process into a math formula and in recent years had turned the process over to a computer. The computer-based approval process moved more quickly “without people” and was considered more efficient. When the financial crisis hit, bankers jumped to cut back on the bank’s credit risk. If a business or person fit the computer’s profile of a credit risk, the bank moved automatically to reign in their credit so the bank would reduce its default exposure.
Ms. Landis suggested that a person’s best recourse may be to “look for lenders where they are going to be looking at the individual again, getting the people back involved, and letting the computers be in the second position.” This worked in the case of Ms. Whiting. She was able to secure loans for her business expansion from a local bank. Thanks to the intervention of CBS News in covering her story, she was also able to secure credit from her “big bank” as well.
The moral of this story? Constantly watch your businesses’ Credit Scores and consider aligning your business with a local bank as well. For more on this story see Credit crunch for job creaters and if you have questions about expanding your business, contact a business lawyer at Wood, Atter and Wolf, P.A. with offices in Jacksonville and Ponte Vedra Beach, Florida.
