SME Credit Score Factor

From Open Risk Manual


An SME Credit Score Factor is any indicator, attribute, characteristic that can be used (usually after being converted to a numerical form) as input in the construction of a numerical SME Credit Score as part of an SME Credit Scorecard building procedure. These factors typically serve as predictors of Borrower behaviour in SME Lending

Conceptual Categories

There is a large variety of possible Credit Data sources (and it keeps expanding with the availability of Alternative Credit Data). Therefore a grouping of data inputs that can be used as credit risk factors into conceptual categories is useful as an organizing principle.

Using Five Cs of Credit

The Five Cs Of Credit Analysis applies to SME Lending and help the conceptual organization of various possible credit factors:

  • Capacity, an SME borrower's ability to repay their debt, on the basis of their projected income profile and their other expenditures (including other debt)
  • Capital, the asset base (net worth) of the borrower and the degree to which it is committed to support a given amount of debt
  • Character, a borrower's overall behavioural profile towards repayment of debt
  • Collateral, any assets the borrower pledges as security for their borrowed funds
  • Conditions, referring to both the lending conditions and the business conditions

Variable Types

The nature of variables used as inputs can vary significantly. The following is a list of some relevant dimensions:

  • Quantitative versus Qualitative Risk Factors is a major dichotomy. Qualitative risk factors will typically be captured in text, have an element of subjectivity and in general can be hard to process with quantitative methods
  • In turn Quantitative data can be separated into
    • Financial (Accounting) Data (that have traditionally been the backbone of credit analysis) versus Non-Financial Quantitative Data
    • Numerical (with a continuous range) versus Categorical Data (discrete category choices)

NB: It is important to distinguish qualitative assessments from categorical data. The primarily issue with the former is the potentially uncontrolled Human Judgement involved and the format in which it is delivered (while keeping in mind that numerical or categorical data may also suffer and hide subjectivity)

Other possible classifications that are more relevant at the modelling stage:

  • Using Absolute Values versus Peer Group assessment
  • Using Absolute Values versus Ratios or Percentages

List of SME Credit Score Factors

The following sections have indicative list of factors that have been discussed in the literature. A subset of these factors are formalized and documented in the SME Credit Data table.


  • Date of incorporation (or significant acquisition/ merger)
  • Type of firm

Business Track Record

  • Markets in which the company operates and their position in the business life-cycle
  • Positions vis a vis competitors and their competitive strength
  • Nature of the competitive advantages (cost, differentiation/ distinctiveness of products, quality/innovation/technology, dominant/ defensible).
  • Years the company has operated in the actual core business

Financial Statements Based Factors

Data extracted from financial accounts and typically (but not necessarily) converted into ratios

  • Earnings and Profitability: net income, EBITDA, etc.
  • Repayment ability: Interest expense etc.
  • Solvency: own funds / equity / total balance sheet, etc.
  • Liquidity: working capital, liability maturity profile
  • Turnover and Activity Ratios

Business Positioning

  • Location (Geographic) Advantage
  • Quality of the client base
  • Quality of perception in the market
  • Industry and Macroeconomic Assessment
  • Government Policies
  • Marketing Network

Business Strategy

  • Strategic plans
  • Business plan
  • Growth forecast
  • In case a business plan has been developed, the stage of strategy implementation
  • Proportion of assets/ investments not strategically linked to the company’s business
  • Extraordinary transactions (revaluations, mergers, divisions, transfers of business divisions, demerger of business) and their objective

Management Factors

  • Degree of involvement in the ownership and management of the company
  • The overall assessment of management’s knowledge, experience, qualifications and competence(in relation to competitors)
  • Key Person Risk
  • Quality of Management information systems
  • Bank-customer relationship (proprietary information)

Internal Behavioural Data

  • Number and size of transactions
  • Maximum/ minimum balances, Variances
  • Length of the relationship, past litigation
  • Violation of credit lines

Quality of Available Information

  • Information submitted on company’s results and projections
  • Considerations released by auditors on the quality of budgetary information
  • Negative signals in the relationship history

Externally Sourced Information

Acquired from credit bureaus, Credit Referencing agencies

  • Addresses
  • Court judgements
  • Payment histories

Stylized Facts

  • Behavioural predictors apparently work well for shorter periods whereas accounting data work better over longer periods.

Literature Survey

Country Year Authors Variables
United States 1968 Altman EBIT/assets; retained earnings/assets; working capital/assets; sales/assets; market value MV equity/book value of debt
Japan 1982 Ko EBIT/sales; working capital/debt; inventory turnover 2 years prior/inventory turnover 3 years prior; MV equity/debt; standard error of net income
Japan 1984 Takahashi et al. Net worth/fixed assets; current liabilities/assets; voluntary reserves plus unappropriated surplus/assets; interest expense/sales; earned surplus; increase in residual value/sales; ordinary profit/assets; sales ) variable costs
Switzerland 1973 Weibel Liquidity (near monetary resource asset ) current liabilities)/operating expenses prior to depreciation; inventory turnover; debt/assets
Germany 1988 Baetge et al. Net worth/(total assets ) quick assets ) property and plant); (operating income + ordinary depreciation + addition to pension reserves)/assets; (cash income ) expenses)/short-term liabilities
Germany 1984 von Stein and Ziegler Capital borrowed/total capital; short-term borrowed capital/output; accounts payable for purchases and deliveries/material costs; (bill of exchange liabilities + accounts payable)/output; (current assets ) short-term borrowed capital)/ output; equity/(total assets ) borrowed capital; (operational result + depreciation)/total capital borrowed liquid result + depreciation)/net turnover; (operational result + depreciation)/short-term assets ) real estate); equity/(tangible property ) real estate); short-term borrowed capital/current assets; (working expenditure ) depreciation on tangible property)/(liquid assets + accounts receivable ) short-term borrowed capital); operational result/capital; (operational
England 1979 Marais Current assets/gross total assets; 1/gross total assets; cash flow/current liabilities;
England 1982 Earl and Marais (funds generated from operations ) net change in working capital)/debt
Canada 1981 Altman and Lavallee Current assets/current liabilities; net after-tax profits/debt; rate of growth of equity ) rate of asset growth; debt/assets; sales/assets
The Netherlands 1979 Bilderbeek Retained earnings/assets; accounts payable/sales; added value/assets; sales/assets; net profit/equity
The Netherlands 1978 van Frederkslust Liquidity ratio (change in short-term debt over time); profitability ratio (rate of return on equity)
Spain 1988 Fernandez Return on investment; cash flow/current liabilities; quick ratio/industry value; before tax earnings/sales; cash flow/sales; (permanent funds/net fixed assets)/ industry value
Italy 1994 Altman et al. Ability to bear cost of debt; liquidity; ability to bear financial debt; profitability; assets/liabilities; profit accumulation; trade indebtedness; efficiency
Australia 1984 Izan EBIT/interest; MV equity/liabilities; EBIT/assets; funded debt/shareholder funds; current assets/current liabilities
Greece 1988 Gloubos and Grammatikos Gross income/current liabilities; debt/assets; net working capital/assets; gross income/assets; current assets/current liabilities
Brazil 1979 Altman et al. Retained earnings/assets; EBIT/assets; sales/assets; MV equity/book value of liabilities
India 1988 Bhatia Cash flow/debt; current ratio; profit after tax/net worth; interest/output; sales/ assets; stock of finished goods/sales; working capital management ratio
Korea 1995 Altman et al. Log(assets); log(sales/assets); retained earnings/assets; MV of equity/liabilities
Singapore 1988 Ta and Seah Operating profit/liabilities; current assets/current liabilities; EAIT/paid-up capital; sales/working capital; (current assets ) stocks ) current liabilities)/EBIT; total shareholders’ fund/liabilities; ordinary shareholders’ fund/capital used
Finland 1988 Suominen Profitability: (quick flow ) direct taxes)/assets; Liquidity: (quick assets/total assets); liabilities/assets
Uruguay 1988 Pascale Sales/debt; net earnings/assets; long-term debt/total debt
Turkey 1988 Unal EBIT/assets; quick assets/current debt; net working capital/sales; quick assets/ inventory; debt/assets; long-term debt/assets

Issues and Challenges

  • Deciding on factors relevant and useful for SME credit analysis
  • In practice collecting the quantitative and qualitative information to underpin an acceptable credit analysis may be more challenging for an SME than a larger corporate entities. Two key handicaps (as discussed in the SME Credit Gap):
    • Lack of market listing
    • Lack of detailed financial statements

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