Limitations of Credit Bureaus in Assessing the Risk of New Businesses

The existing risk scoring models and products offered by the credit bureaus such as Experian, Equifax and Dun & Bradstreet do not offer a risk assessment of new businesses that have not filed any accounts.

Due to the limited input data (primarily accounts) used by these providers, they are unable to assess the risk of and score new businesses.

ORX Scores for New Businesses

Leveraging its technology to extract and analyse a wider variety of publicly available data sources linked to businesses, ORX offers scores for companies for which the credit bureaus do not.

The accuracy of the ORX model in predicting business closure and insolvency for new businesses with no financial filings was evaluated on a standalone basis.

New businesses were defined as companies that were 14 ≥ months ≥ 12 old on the 1st of November 2016 with company status ’Active’. This definition was used because companies usually take 18 months to file their first set of accounts.

The ORX …

The risk of a business closing varies from region to region and this can be of significant interest to lenders and insurers when pricing the risk of companies.

We decided to evaluate the performance of the Open Risk Exchange (ORX) credit scoring model by comparing our business closure predictions by area (as defined by ‘Postcode Area’) as at November 2016 with the actual proportion of business closures by area over a 12 month period to November 2017.

The results can be highlighted using maps of the United Kingdom as shown below:

Probability of Business Closure November 2016

Probability of Business Closure November 2016

Figure 1: Probability of Business Closure November 2016

The map above demonstrates how the ORX Probability of Business Closure varied across the United Kingdom by area in November 2016. Note that the average of the probabilities of business closure for registered companies in a given area has been used for this analysis.

The darker the area on the map, the higher the Probability of Business Closure as predicted by our model.

One can …

The two tables below can be used as a guide to interpreting the ORX ratings for business closure and insolvency.

ORX Business Closure Ratings

ORX Business Closure Ratings Table

Figure 1: ORX Business Closure Ratings Table

ORX Insolvency Ratings

ORX Insolvency Ratings Table

Figure 2: ORX Insolvency Ratings Table

Please note the following:

  • a range of [0.08%, 0.16%) refers to values from 0.08% (including 0.08%) to 0.16% (excluding 0.16%)
  • the corresponding S&P ratings provided in the ORX insolvency ratings table are an approximation based on our internal analysis and for indicative purposes only