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To hear bankers tell it, credit scoring is the best thing to happen to small-business borrowers since the invention of compound interest. Forget haggling over things like how well your business is doing or what your competitors are up to. Just hand in some predetermined data about yourself and your company, let the computer crunch the numbers, and voila: Out comes a "credit score"that predicts the chances that you'll actually pay off the loan. Score high enough, and you get approved, sometimes within minutes.

But what if you don't score high enough?
Good luck. The test is designed to be objective, and lenders say there's little you can do to alter the score. Some say they'll try to work out a deal the old-fashioned way, one on one, based on your special situation. In reality, though you've just been branded an odds-on deadbeat who warrants higher interest rates or no loan at all. You can't argue with a machine.

Or can you?
Consider Spencer and Huguette Winston, who own Spencer's Limousine & Tours in Santa Barbara, Calif. Three years ago, the couple applied for a loan to buy a new car for their business. After spending hours filling out forms about how long they'd lived in their house, how long they'd been in business, how much money they were making, how many bank accounts they had, and where those accounts were located, the couple received a form letter with a check mark in a box notifying them they'd been rejected. The only explanation offered was that their business did not meet the bank's standards for profitability.

"I was frustrated and angry," says Spencer. "I was working hard at the business, I knew we were making it, and I'm being told it's not good enough." Spencer began complaining to anyone who would listen, including his accountant, who knew a few things about how credit scoring works. He told them to pay off $750 in back taxes--the legacy of a prior business--instead of using installments. The Winstons complied in early 1998, and within months, they were approved not only for a mortgage but also for their first small-business loan. "I couldn't believe it," says Spencer. "I was elated that the bank trusted us."

The Winstons drove down to Los Angeles the next day and bought a white, 10-passenger pre-owned luxury limo: black leather seats with five matching pillows, a TV/VCR and CD player, a full bar with 10 champagne and 10 cocktail glasses, and a moon roof. Last month, they used it to drive Pedro Almodovar, the director of the winning foreign-language film, All About My Mother, to the Oscar ceremony. Since then, they have been approved for three more loans totaling $75,000 to buy three more vehicles. Now, their five-year-old business is generating revenue of $150,000 a year.

So much for the idea that you can't alter the results. In fact, credit scoring is a lot like taking college admissions tests: There's plenty you can do to improve your score if you know how the system works. Just don't expect much help from your lender--most consider the actual formulas a trade secret and don't want people angling for an advantage (page F.54). But with an assist from accountants, bankers, and consultants, frontier was able to piece together an outline of what counts most, along with a list of legally and ethically correct things you can do to boost your score that would make Stanley Kaplan proud.

Forget about avoiding the test. Scoring is already ubiquitous in consumer lending, and 22 of the 25 biggest players in the small-business loan market use the system, according to Fair, Isaac & Co., a pioneer in the development of credit-scoring software. More than 90% of lenders surveyed reported using the system for small-business loans in 1999, and it's the framework used by online lenders such as LiveCapital.com, which matches borrowers with lenders on the basis of credit scores in as little as five minutes. Almost any loan of $50,000 or less issued by a national financial services company will have gone through a credit scoring system.

Here's how it works. Scoring is an analytical process designed to predict whether loan applicants will live up to their debt obligations. It does this by assigning point values for up to 20 factors that lenders have found do a good job of assessing creditworthiness. These data are derived from the loan application, personal and business credit records. The more points you get, the better credit risk you represent.

The best-known credit-scoring models are provided by Fair Isaac. The score on its Small Business Scoring Service ranges from 50 to 350, with most small businesses falling into the 150 to 250 area. While lenders set their own cutoff points, if you score above 220, that's generally good, while scores below 170 are considered high risk, says Latimer Asch, a senior vice-president and guru of credit scoring at Fair Isaac. Banks that do a lot of small-business lending, such as Wells Fargo, develop custom models. As a result, the actual numbers or calculation will vary from lender to lender.

To be sure, this system has been an unqualified boon to a vast number of borrowers. By using computers instead of loan officers, credit scoring has speeded up the loan process and cut costs. It also has helped lenders offer lower prices to better risks and higher prices to applicants who never would have been offered credit before. Susan Bloom, for example, is a 36-year-old budding online toy entrepreneur. She qualified in November for a $40,000 loan from her bank in Santa Barbara despite the fact that her business has been up and running only since last July. While she's paying 13% interest, she couldn't be happier. "Credit scoring got me the loan," she says, adding that she'll use the money to buy the natural-material toys from Europe that she sells on her Web site, toymobile.com.

What swung the deal, however, was Bloom's strong personal credit history. They may be called "business loans," but the overriding factor in a small-business credit score is you--your personal credit history and the history of any co-owners. That's because Fair Isaac did groundbreaking research from 1988-1990 that found personal behavior is a strong predictor of how a person's business will behave when it comes to paying bills. If your business is less than two years old, your credit score and ability to get a loan will depend almost entirely on your own credit history, says Mike Grossman, chief executive of LiveCapital. Specifically, the system looks at whether you pay your personal bills on time or 30, 60, or 90 days late. The later you wait to pay, the fewer points you get, and the more bills you pay late, the more your score gets knocked down. Some scoring systems also look at the business owner's net worth. At Wells Fargo & Co., owners get points for the equity in their home and the value of their retirement and other investment accounts.

The next key input is how much credit you've already got access to and balances on your accounts. If lines of credit are maxed out, lenders worry that there is little room to maneuver if the business runs into trouble. Other major red flags include bankruptcies, debts turned over to a collection agency, liens, and even overdue child-support payments. You can even get penalized for shopping too hard for credit. Gartner Group notes that online applications make it easier to apply for several loans at a time, but each one generates an "inquiry" that gets noted in your credit file. Too many inquiries damage your rating, says Gartner, which derides the current formula for being behind the times.

Finally, specific business characteristics are weighed. They include the size of the company; its age; the industry in which it does business; and whether it's a corporation, partnership, or sole proprietorship. A sole prop gets fewer points than a partnership, and a partnership gets fewer points than a corporation. After all, if you're a sole proprietor and you get hit by a bus, all bets are off on your business. By the same token, a manufacturer gets higher points than bars or restaurants because it's less likely to go under quickly, says Thomas B. Astebro, professor of management science at the University of Waterloo in Canada and president of Astebro Bernhardt, which develops credit scoring systems for financial services companies.

Remarkably, the score often doesn't include how much money your business makes. Many small companies don't have much operating history, and even if they do, lenders find it time-consuming to analyze this information. More important is the business' payment history, says Astebro. Some systems will take into account average monthly bank balances (higher is always better) and the ratio of debt service to cash flow. Wells Fargo, for example, looks for annual cash flow of at least 1.5 times debt payments, says Michael R. James, executive vice-president for business banking.

Even after all that, you're not home free. Many lenders use "decision overlays" or "overrides" focusing on a single piece of data that can throw out applicants no matter how high their overall credit score. Such overrides often include a bankruptcy on the credit report or a current delinquency--that is, a payment 30 days or more overdue.

How do you go about "fixing" your credit score?
Start with your personal credit, the No. 1 factor. Pay back taxes and settle outstanding liens and judgments from lawsuits. Maybe you withheld payment as a matter of principle, but this is business. "Don't cut off your nose to spite yourself," says Fair Isaac's Asch. In fact, chronic late payments are a show-stopper for scoring systems, which don't care whether it happened because you just forgot or because you didn't have the money. This applies to business and personal debts. Be aware that the most heavily weighted period will be the last 365 days. You want to make sure you look good in the year leading up to your loan request, so if you messed up 11 months ago, think about waiting a month to apply.

Next comes your business credit. If you've had a dispute with a supplier who botched the order or gave lousy service, negotiate a deal or pay up. Make sure you know what's in your credit report by ordering copies from the major consumer and commercial credit bureaus (table, page F.48). LiveCapital.com, in partnership with Fair Isaac, offers a new service called CreditFYI that provides a credit report on your business for $14.95.

Try to make cash flow match expenses more closely by staggering your suppliers' invoices or try selling some of your more difficult receivables to a "factor." You'll get nicked for up to 30% of the value, but you'll get paid regularly. It's worth it on a small amount of receivables if it helps get a sizable bank loan, says Dave Schmidt, a principal at A2 Resources, a commercial credit consulting business in Yardley, Pa. If you know you won't be able to make full payment to a supplier, call the supplier and negotiate a partial payment. With a deal in place, a supplier is less likely to report your bill as late to the credit bureaus, says Brian O'Connor, managing editor of bankrate.com, a consumer and business financial Web site. Be careful, though, not to overmanage your payment history because you lose points for erratic payments. "If you're paying slow, such as 30 days or so, maintain that pattern," advises Michael J. Banasiak, president of Predictive Business Decision Systems in Tinton Falls, N.J., which develops credit-scoring models.

If your company does pay its bills on time, make sure it is registered with the secretary of state where you're incorporated. This ensures that basic information on your business is fed to the commercial credit bureaus. (Lack of commercial data is one reason lenders are so dependent on personal credit history.) Also, try to do business with larger vendors. They're more likely to report their data to the commercial credit bureaus than a local mom- and-pop stationery store.

If you do get turned down, ask to see copies of the information used to make the decision. Lenders must provide you with an explanation within 30 days--whether it was due to the score or a decision overlay--and on which items you fell furthest from the mark, says Asch. After that, it's your job to figure out how to make the numbers look better or appeal for a "low-side override," a form of intervention by a traditional human bank official that works for about 5% of all loans, says Astebro. If you fear that your credit rating is weak but your company's finances are great, include a financial statement with your application. Or perhaps you can find a lender who doesn't rely on credit scoring. But with the industry embracing the paint-by-numbers approach, don't bank on it.

-- Clean up judgments, liens, collections, or delinquencies on your personal and business files.

-- Settle disputes with suppliers or former employees.

-- Pay your bills on time for at least 12 months. Ask suppliers to time their bills to match your cash flow. Negotiate partial payment, or sell receivables.

-- Consolidate credit-card debt and pay down balances so that they are no more than 50% of their limits.

-- Build your commercial credit record. Register with the secretary of state where your company is incorporated. Buy from vendors who report payments to credit bureaus.