There's an unsustainable trend in business lending. The lenders prioritize speed over credit quality.
The way most of these loans are underwritten today is to the business owner's FICO credit score and maybe a couple of months of historical bank statement data from the business. There's no actual underwriting, or very limited underwriting on the business and its performance itself.
This trend has been driven primarily by competition where speed has mattered more than credit quality, especially for loans under half a million dollars.
FICO credit scores and bank statements have been fine in such a good market predicting credit risk of businesses. Last week, FICO changed their underwriting model that affected some people's scores. They could go up or down by 20, 30 points.
But what's strange to me is the fact that FICO created a new underwriting model the rewrote people's credit scores has absolutely nothing to do with whether or not the business is in good financial health and can repay the loan.
So while I understand how competition could drive the market to really skip a lot of the financial analysis and focus on the person running the business, there will be a correction driven by business performance where these lenders will have to begin taking in more and more data on the financial health of the business itself.
I don't know who it will affect. I dont know when it will affect them. I don't know how bad the effect will be. But the world cannot go on forever where business loans are primarily done with three months of bank statement data and the owner's FICO credit score.