NACM Survey Shows Proprietary Scoring Inappropriate, Impractical for Many Respondents

NACM’s July Survey question, “Do you use a proprietary credit scoring system in
your day-to-day evaluation of accounts?” showed that a majority of respondents
do not use a proprietary system, with 67.8% of participants responding “no” and
a still-significant 32.2% of respondents answering “yes.” Many respondents who
answered “no” indicated in their comments that they were either in the process
of creating their own proprietary scoring system or that they were looking into
it. Many also indicated that, instead of their own proprietary systems, they use
scoring systems offered by a number of different software vendors.

A
common refrain heard from a number of respondents who don’t rely on a
proprietary scoring model for their day-to-day evaluations was that the current
economic situation is preventing, rather than necessitating, the use of credit
scoring. “We do not have a large volume of applications and have been able to
process them without a scoring model since our industry is down right now and
nothing is following the old normal patterns,” said one respondent. “Because my
management has decreased staffing in the credit department, I have not had the
time to develop a credit scoring system. My department has gone from five people
to only my position,” said another respondent.

Several other reasons
were given for why credit scoring was impractical, including customer base and
industry concerns. “The nature of our customer base precludes such a scoring
system,” said one respondent. “Based on our volume (low) we find each credit
history check can be done with a complete review and not by scoring. The
diversified market we deal with also makes credit scoring impractical,” said
another respondent. One participant in the construction industry noted that the
nature of the business makes a proprietary scoring model unreasonable. “That is
a difficult type of measurement to apply to contracting firms,” said the
respondent. “The overall ‘food chain’ varies with each construction project and
determines the creditworthiness of each job individually.” This sentiment was
echoed by other respondents in the industry. “In the construction industry we
evaluate the credit standing of the customer very liberally, relying primarily
on the position of the parties on the project and the bond/lien laws for a
particular state,” said another respondent.

“We would use a scoring
system, but cost and the low number of accounts is preventative,” said one
respondent, in summary.

For those respondents who do use a homemade or
proprietary scoring system, the majority noticed that it was “only part of the
puzzle” and rarely used as the only indicator of a customer’s creditworthiness,
using credit scoring “not as an absolute, but a factor,” and referring to it as
“just one part of the evaluation process.” 

Jacob Barron, NACM staff writer

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