On October 15, 2012, Sageworks, Inc., a financial information company, announced the release of the Business Credit Report by Sageworks. With the release of the Business Credit Report, data on the likelihood a business will default will be more accessible and accurate than ever. The engine behind the unique business credit score provided within the report is a predictive probability of default model.
"The decision to develop the Business Credit Report was really logical for us given that it sits squarely at the intersection of our two core businesses, collecting and analyzing private company financial data and providing industry-leading credit risk management technology to financial institutions," commented Sageworks President Scott Ogle.
The availability of a business credit report fueled by fundamental financial analysis of both the business and its owner(s) has become even more critical following the US economic recession when business default rates spiked. The number of businesses filing for bankruptcy increased from under 20,000 in 2006 to over 60,000 in 2009. Business bankruptcies have since declined slowly to a rate of 47,000 in 2011, according to the Administrative Office of the US Courts and BankruptcyData.com.
As a response to the changing credit and banking environment over the past five years, BASEL III regulations for financial institutions require "forward-looking analysis" on borrowers such as that provided by the Business Credit Report.
The model and resulting company credit score were developed by studying the historical default behavior of business loans and the financial characteristics of the businesses and their owner(s) prior to default. The Business Credit Report combines financial data from the company and its owner(s) for a more comprehensive view of the company's credit risk and probability of default. The use of both personal and business data to create the business credit rating is critical given the interlinking between businesses' and owners' financials and risk.
The Business Credit Report is generated by a unique data-driven model that relies on the analysis of objective financial statement information. The report does not just rely on payment histories, demographic data, or community-based scores. The model was validated by researchers in the industry, banking consultants, and financial institutions.
In the paper "Case for Evaluating Business Credit," sources suggest that a traditional credit score based largely on past credit history may not be as accurate in predicting who will actually default as is a score based on statistical modeling that can estimate the probability of default. In the paper, Rebel Cole, PhD, professor of finance at DePaul University, notes, "A credit score is a useful predictor of default, but it's by far not the only thing that matters. A firm may have never missed a payment before until it blows apart."
While the Business Credit Report makes it easy for a company to check its own credit rating and default risk when applying for a loan or assessing its financial health, it was also brought to market based on feedback that more accurate information is needed for financial due diligence, vendor due diligence, and a customer or supplier credit check.
For more information or to purchase the Business Credit Report by Sageworks online, visit the Sageworks website.