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Within the commercial client segment, small-business lending is gradually becoming a major target for many banks. The new Basel Capital Accord has helped the financial sector to recognize small and medium-sized enterprises (SMEs) as a client, distinct from the large corporation. In this context, it is increasingly important to develop appropriate risk models for this large and potentially even larger portion of bank assets. So far, there are few studies that have focused on developing credit risk models specifically for small firms which have included non-financial information as predictors of the company credit worthiness.

For the first time, in this study we have available non-financial. We employ a sample consisting of over 39,000 unlisted small firms of which 50% failed during the period 1999-2008. We find that qualitative data relating to such variables as legal action by creditors to recover unpaid debts, company …