Credit rating of micro enterprises and efficiency

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Banks will lend you an umbrella on a sunny day and will want it back when it starts raining. Though you can bet on such an outcome, you can reasonably be confident that when applying for a loan – no matter what the weather forecast says – you’ll have to prove to the bank you don’t need one, and not just in terms of funding needs but also from a skill point of view.

Alas, many micro entrepreneurs either do not have the management skills to run a business or simply lack the time necessary to dedicate to management activities. Who’s the micro entrepreneur after all? An enterprising Harvard MBA graduate? A skillful executive on a leveraged buy-out spin-off? No, not at all. You’ll most likely find an answer looking for a former plumber’s experience or for a Main Street storekeeper’s initiative with the instinctive – or just necessary – bottom-up approach involved in the day-to-day operations. 

Running a business – and incidentally paying back a loan – requires prioritizing decision-making related activities with a look on their strategic impact on the firm’s medium/long term growth potential, while most micro enterprises fail to acquire the size needed to generate the resources necessary to express dedicated functions to vital activities such as finance, and more important, strategic management.

A former carpenter is not likely to characterize delegation (i.e. appointing a general manager) as an avenue to organizationally safeguard a competent hold on his firm’s future growth – though his skepticism may be understandable given the perceived agency costs – nor is he likely to reach these key decisions given the long hours needed to run operations at the workshop.

Skills are an asset assessed by a bank’s credit rating procedure. Management skills lower your default risk probability: the higher, the fewer chances a micro enterprise’s future will take the bank by surprise. A micro entrepreneur’s approach to efficient management is a trial-and-error form of average cost reduction through experience rather than knowledge: know-how builds up at the expenses of time.

Having said that, young and old readers should take a look at a bank’s retail credit rating procedure to notice the demand-and-supply adaptation mechanism that ensures loan applicants’s features (i.e. micro entrepreneurs’s ones) match a lender’s employee training in assessing credit quality. As micro entrepreneurs are inferior managers, so are a bank’s retail front-office employees at assessing credit quality. After all, Nobel laureate Daniel Kahneman argues that to “maximize predictive accuracy, final decisions should be left to formulas”: that’s probably the reason why a bank’s employee rating assessment gets ever more increasingly by-passed by an internal based rating system relying on hard information. If micro entrepreneurs lack the laws of business administration, why should bank have the math laws of prediction?

 

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Posted in Economics, Management
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