Credit Risk Models by Type of Business

This empirical study focuses on credit risk models for small businesses in the U.S. and tests if different models are needed based on the type of business. The application is specifically for small farm businesses (dairy, beef, grain, and hog farm businesses) in Illinois from 1995 to 2006. The results show that the effect of financial ratios on repayment capacity, and thus on credit risk, differ for farm businesses based on their business types. These findings show that working with aggregated models across business types in the U.S. may lead to misleading results and that lenders should take into consideration the type of business when evaluating the credit worthiness and repayment capacity of small businesses