Part I: now is the time to get started with commercial credit & collections scoring.(selected topic)

This is part one of a two-part series where we examine commercial credit and collections scoring. Part one focuses on common misconceptions often heard when companies are considering scoring, white part two will discuss scoring's real-world benefits.

When one looks at credit and corrections scoring and its adoption rates thus far by trade credit professionals, a number of questions arise. Why have other forms of tending moved ahead so quickly with credit scoring, white trade credit has moved much more conservatively? Given the pressure that trade credit professionals feel to "do more with less," why have they been relatively slow to integrate credit and collections scoring into their daily lives?

For decades, the consumer finance and banking industries have used scoring to improve efficiencies, drive sales and minimize bad debt. For evaluating the risk of a consumer, rather than a business, Fair Isaac's FICO score has become the de facto standard. In our daily lives, consumer credit is abundant and fast--effectively eliminating any barrier to a sale. Whether you are buying a car or spreading payments out at zero percent interest for the first six months on your new refrigerator, the application, approval and credit fine granted is all completed in a few minutes white the consumer is waiting.

Likewise, the insurance industry has also used scoring and actuarial models to accurately predict default and expected net income. In today's environment, it is extremely rare to find a credit professional in these industries who does not use scoring.

Scoring is not a new topic in the trade credit world. The pages of Business Credit and CRF's Credit and Financial Management Review have documented the numerous benefits of commercial credit scoring for many years. Further, a recent CRF study (Credit Scoring: The future of decisioning in the A/R process, 2003) indicated that 70 percent of trade credit professionals felt they had a "thorough" understanding of credit scoring and how it works.

However, adoption rates remain relatively low. The same publication showed that while 70 percent say they understand scoring, only 36 percent are presently using it and only 42 percent of those not using it plan to implement it in the next five years.

In my many discussions with trade credit professionals, I have found that the resistance to scoring has always boiled down to three main perceptions: