January 2014 No. 419
Credit Scores and Credit Market Outcomes:
Evidence from the Survey of Small Business Finances and the Kauffman Firm Survey
By Rebel A. Cole, Krahenbuhl Global Consulting, Chicago, IL 60602. 78 pages.
Under contract number SBAHQ-12-M-0168.
Small businesses often struggle to find available
credit. Building on previous literature, this research
analyzes what factors, including business credit
scores, may explain credit outcomes (approvals or
denials) for small businesses. It further asks what
role business credit scores might play in the credit
outcomes of women- and minority-owned small
Credit Scores. Statistically derived and numerically
presented, a “credit score” reflects an individual or
entity’s likelihood of repaying a debt. Generally,
a higher credit score correlates with a lower probability
of default. The consumer credit market has
utilized credit scores for decades, but small business
credit scores emerged only during the 1990s. Large
lenders adopted small business credit scoring in subsequent
Evidence indicates the emergence of business
credit scoring may have increased credit availability
to small businesses. A study of small business loan
patterns indicates that banks using business credit
scoring may feel able to make riskier loans at the
margin and to increase their pool of available credit.
Still, while this study focuses on business credit
scores, evidence indicates the credit market may
make use of both consumer and business credit
scores in determining small business credit outcomes.
For example, a study using U.S. Small
Business Administration data finds that community
lenders may weigh consumer credit scores heavily
in evaluating small firms, often to the exclusion of
business credit scores. Such findings may prove relevant
to policy determinations regarding the use and
transparency of all types of credit scores.
Women- and Minority-Owned Small Businesses.
Pinpointing possible differences in credit access
across race, ethnicity, and gender could prove important
both to understanding varied credit outcomes
and to policy determinations. For example, U.S.
Census data indicate that minority-owned firms are
smaller as measured by both sales revenues and
employment, less profitable as measured by return
on assets, and less likely to survive than their non-
minority counterparts. In addition, women-owned
firms tend to start with much less capital than their
male counterparts, and Census data indicate women
are also less likely to start or acquire firms with business
loans from banks or financial institutions (5.5
percent of women owners versus 11.4 percent of
Several empirical studies have found evidence of
disparate credit market outcomes for minority-owned
small businesses. More specifically, several studies
have found evidence of disproportionate loan denials
to black-owned and Hispanic-owned firms, after controlling
for other variables. This study confirms these
findings and further asks whether business credit
scores disproportionately affect access to credit for
women-owned and minority-owned firms. Figures 1
and 2 illustrate business credit score distribution by
race and gender.
Regarding general access to credit, this study finds
that small firms with lower credit scores are: (i)
more likely to need additional credit because their
credit needs have not already been met by past borrowings;
(ii) more likely to be discouraged from
applying for credit when they report a need for
additional credit; and (iii) more likely to be denied
credit when they need additional credit and apply
for credit. Results also confirm prior findings that
firm-lender relationships play a significant role in
credit outcomes for small firms. Further, there is no
evidence that credit scores reduce the importance of
Empirical results also confirm prior findings that
the credit market disproportionately denies credit to
minority-owned firms when they need and apply for
additional credit, after controlling for other variables.
(See Figure 3 for a distribution of credit market
outcomes by race, ethnicity and gender1). However,
these results also indicate that credit scores do not
disproportionately affect credit availability for either
female-owned or minority-owned firms, relative to
male-owned or non-minority-owned firms. In other
words, the study did not find evidence that numerical
credit score values were used disproportionately in
credit determinations for minority-owned or women-
Evidence of disparate credit market outcomes for
minority-owned businesses as well as the circumstances
under which such possible discrimination
occurs could prove relevant to policymakers. This
study confirms prior findings of disparate credit market
outcomes to minority-owned businesses in the
form of loan denials but also further finds that institutions
do not appear to use credit scores disproportionately
in making credit determinations. This distinction
in the results may help to narrow the field of
policy variables that drive disparate credit outcomes
to minority-owned small businesses.
For instance, while this study finds no evidence
of disparate application of credit scores, it does not
reach the question of what goes into credit score
inputs and formulation. In addition, the use of consumer
credit scores in small business evaluation
may also have implications for transparency in credit
score formulation. In a September 2012 report, the
Consumer Financial Protection Bureau (CFPB) analyzed
credit scores from 200,000 credit files from
each of the three major U.S. credit-rating agencies
and found that different models gave “meaningfully
different results” for “a substantial minority” of consumers.
In particular, the scores sold to consumers
often differed from those sold to prospective lenders.
Further, this study reveals correlation between
minority status and business credit scores and
existing wealth. Such findings may inspire further
research to explore disparate credit market outcomes
for minority-owned small businesses in the context
of wealth gaps.
Finally, the continued significance of relationship
lending, as confirmed by this study, may indicate a
need for further exploration of social capital issues
among minority-owned and women-owned businesses.
Recent studies have found that firm-lender relationships
positively influence the decision to apply
for a loan as well as the outcome. In particular, firms
that report longer relationships with their prospective
lender are less likely to be credit constrained.
Given these findings and their possible implications,
further research and policy discussion may be
Scope and Methodology
This study employs data from the Federal Reserve
Board’s Surveys of Small Business Finances (SSBF)
and from the Kauffman Foundation’s Kauffman Firm
Survey (KFS) to evaluate whether credit scoring
affects the availability of credit to women-owned-
and minority-owned firms.
Using a three-step sequential logit model, the
researcher poses the questions: who needs credit,
who applies for credit, and who gets credit? Odds-
ratio results indicate whether discernible relative differences
in credit scoring impacts to women-owned
and minority-owned firms occurred.
The research also uses descriptive statistics and
observable data patterns to identify interesting correlations
between gender, race and ethnicity, and
industry relative to businesses credit scores.
This report was peer reviewed consistent with
Advocacy’s data quality guidelines. More information
on this process can be obtained by contacting the
director of economic research at email@example.com
or (202) 205-6533.
This report is available on the Office of Advocacy’s
website at www.sba.gov/advocacy/7540. To receive
email notices of new Advocacy research, news
releases, regulatory communications, publications,
and the latest issue of The Small Business Advocate
newsletter, visit www.sba.gov/updates and subscribe
to the Small Business Regulation & Research
This document is a summary of the report identified above,
developed under contract for the Small Business Administration, Office
of Advocacy. As stated in the report, the final conclusions of the full report
do not necessarily reflect the views of the Office of
Advocacy. This summary may contain additional information, analysis,
and policy recommendations from the Office of Advocacy.