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COSTA MESA, Calif. – Credit unions and other lenders typically look at either a personal credit score or a commercial credit score in determining crucial financing decisions, but looking at a blend of the two may be a better way to determine risk, a recent study discovered. Experian compiled a sample of more than 50,000 small businesses, analyzed their information each quarter between August 2001 and August 2005 and examined the correlation between a small business owner’s personal credit score and their commercial credit score. The study also researched the association between the personal payment behavior of a business owner and the payment behavior of the business itself. For more than 82% of small business owners, their life without negative credit marks continued over the four-year study period. In looking at which score went “bad” first-the personal score or commercial score-9.41% revealed trouble on the business side at least one quarter before negative marks appeared on the consumer side, the findings showed. For 8.10%, the first signs of trouble appeared on the personal side first and for .34% of small business owners, both personal and commercial scores reflected problems at the same time. When it came to the size of the business, microbusinesses, which tend to be those with four or fewer employees, had an intertwine of personal and business finances, according to the study. Nearly 70% of these types of businesses began to show problems on the personal side. “The same hand that goes in the pocket for the business is the same hand to pay for groceries,” said Torsten Gerwin, vice president of decision services for Experians’s Business Information Group. “The assets of the owner and the business are so commingled in the early years.” Experian cautioned that even though consumer credit tends to go bad first, this is not necessarily a better predictor than business credit, but indicates that small business owners will tend to sacrifice their own personal finances to save their struggling business. Younger businesses, like smaller businesses, also show signs of weakness on the consumer side first, the study showed. Small businesses in operation up to two years accounted for 30% of all cases where the owners’ personal credit showed the first signs of trouble. At three to five years of operation, the personal and business indicators were almost equal in showing the first blemishes. With those operating for more than five years, problems began first on the business side. “The clear trend is the cash flow is going into the business and that’s a reasonable explanation for why the owner’s credit goes bad first,” Gerwin said. “Three to five years is a turning point for the business.” Experian also wanted to know if one credit report is the leading indicator in a certain instance, how far behind is the other likely to be. The study found that when the personal credit goes bad first, business credit issues tend to follow in the quarter immediately following. In 28.5% of cases, this was the case. However, when the business report led, the consumer report tended to lag significantly. Only 9% of those occurred here. “What might be happening is if you look at [financial institutions] that have both personal and commercial relationships, if you saw some deterioration in credit on the personal side, you might want to adjust on the business side,” said Dan Meder, senior director of Experian’s Commercial Credit Risk Solutions. Meder said using consumer scores for business financing determination might be a “hangover from the consumer days of bringing risk management into the commercial world.” Looking at both consumer and business scores might be one way to go now, Meder said. The study showed both scores dropped an average of 25% over four quarters when the business goes bad first while the consumer side revealed no significant decline over the same period. Blending the scores could cut across issues with the age of business, where consumer scores are not good predictors of risk, the study found. “It’s not a silver bullet but a way to manage any future problems,” Meder said. [email protected]

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