Magazine article Business Credit

Benchmarking and Blending: Keeping Watch on Both Details and the Big Picture

Magazine article Business Credit

Benchmarking and Blending: Keeping Watch on Both Details and the Big Picture

Article excerpt

Keeping a sharp focus on a small-business credit portfolio can be challenging. Equally tough is pulling back the lens to see how a portfolio fits within the big picture. Benchmarking is a useful way to illustrate a portfolio's strengths and weaknesses, define business trends, identify areas of opportunity and uncover useful data to shape strategic planning.

Credit scoring, once prohibitively costly for small businesses, is an increasingly popular tool. But not all scores are alike. For optimum accuracy, the data shows that it's best to use a sophisticated blend of information on the business owner and the business itself.

At the heart of benchmarking are massive amounts of industry-wide data and the ability to make sense of it all--the ability to identify trends over time and discern how a particular portfolio compares with its peers. By measuring a portfolio against the overall economy and current industry standards, credit professionals can implement a plan based on market conditions and adjust that plan as benchmarks are updated.

Performance benchmarks can track numerous trends, including critical ones such as risk profiles, regional bankruptcy statistics, credit line utilization and rate of delinquency and derogatory public record trends.

A look at high-level business benchmarks shows some revealing statistics. First, business in America means small businesses. This poses special challenges to credit professionals that we'll discuss later. For now, let's note that 89% of all U.S. businesses have less than $1 million in annual sales. Millions of businesses have fewer than five employees, including 67% of service businesses and 60% of all retail.

The majority of businesses are relatively static in terms of growth, according to the Oxford LifeCycle metric. Growth businesses--defined as growing 25% faster than normal--account for 27% of all U.S. businesses. Declining or static businesses--growing 25% slower than normal--account for 18%. In the middle 55% are maturing businesses that could, with changes, join the growth businesses or laggards.

Investigate growing businesses and you'll find a reflection of strong consumer spending. Retail accounts for 21% of all businesses, but these businesses comprise 31% of growth businesses. In other words, retail growth is outpacing its percentage of the overall business market. On the other hand, services represent 44% of all businesses but only 37% of businesses classified as growing. These sorts of numbers are by no means set in stone. In a dynamic economy, they will shift. That makes it important to regularly update benchmarks to keep them relevant to the marketplace.

Looking at the country from a regional basis gives a rough idea of business activity. The Northeast, stretching from Ohio to Maine, accounts for 20% of the nation's businesses. California alone is home to 13% of businesses. The Southeast, Southwest, Mid-Atlantic and Midwest regions each account for 11% to 16%. The number of businesses is fewest in the West and Northwest, an area from Kansas to the state of Washington. The territory covers 11 states and a vast amount of land but only 11% of the nation's businesses.

Bankruptcy trends add to the regional picture. Overall, there was a 50% decline in bankruptcies in 2006 compared with the prior year. That number was skewed by a 2005 change in law, but it will remain a valuable metric of business conditions going forward. Regional bankruptcy differences are telling. Two regions accounted for 44% of the nation's bankruptcies in 2006: the Northeast and the Southwest. Meanwhile, despite its large number of active businesses, the Mid-Atlantic states made up only 4% of bankruptcies in 2006.

Those are just broad-brush benchmarks. Another way to evaluate a market is by examining its risk profile and credit trends within a region or industry. Experian[R] examined commercial credit scores nationwide over a 12-month period, based on an analysis of approximately 9 million records in its proprietary BizSource[SM] database. …

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