Amid Rising Loan Defaults and a Risky Lending Climate, Tax Guard Offers Solutions for Lenders Published February 9, 2024

The lending landscape is in a state of transformation, and with rising loan defaults, lenders are facing new challenges. 

According to the latest from S&P Global Ratings, the US loan default rate is forecasted to hit an all-time high this year. In October 2023, the leveraged loan default rate sat at a still-elevated 1.9%. But according to projections, the leveraged loan default rate could climb to 3% by September 2024 as economic growth slows. 

These increased loan defaults will likely be a result of macroeconomic conditions, as inflation, while slowly cooling, is still running hot. Prices remain high, and businesses and consumers will continue to feel the heat. Other economic noise, like labor market chaos and the potential for the Fed to cut rates this year, are confusing small business owners and lenders alike. 

All of this boils down to an incredibly risky and uncertain lending ecosystem, where a good choice for lenders and borrowers is increasingly harder to identify. 

If you’re a lender, the situation is particularly volatile on account of two main factors: 

Risky Borrowers

In the last 12 months, the cohort of total loan issuers rated B-minus or lower in the United States grew by 52%. For reference, the size of the cohort ballooned during the COVID-19 pandemic, peaking in June 2020. The latest reading, however, exceeds pre-pandemic levels. This metric is a reliable indicator of future loan default probabilities and has been steadily climbing quarter after quarter. 

Moreover, the current economic climate, battered by a year of uncertainty and inflation, has made achieving consistent year-over-year growth a rare achievement for many businesses. Even when examining individual industries, it seems no sector is immune from financial turmoil. 

Consumer technology, for example, is the largest sector in leveraged finance that generally trends well against other industries but is facing weaker hardware demand as customers finally reduce post-pandemic spending. Elsewhere, healthcare and pharmaceutical industries face challenges around rising labor costs and regulatory concerns. 

Limited Access to Borrower Information

Small businesses may be relatively new and have a limited operating history or simply have lower transaction volumes than their corporate counterparts, meaning they have thin or no credit profiles at all. Notably, their trade lines aren’t reported to any public data repository, and it’s likely they have opened very few credit accounts. As a result, it’s often difficult to fully understand a business’s financial health based on the few documents readily available.

This slim amount of information available is more than just an inconvenience— sometimes, it can be critical. Major red flags like unpaid small business federal tax debt and federal tax liens easily go undetected, missing from public records searches and escaping even the savviest of lenders seeking to research their potential borrowers. On the flip side, an applicant with a thin credit file might see a loan application get rejected, but with IRS data on their side, might have gotten it approved. 

A lender may think they have the complete picture of how a lender is doing, but in many cases with small businesses, the scarcity of comprehensive and reliable data makes it difficult for lenders to make informed credit decisions. 

So, where do we go from here?

The Path to Risk Mitigation: Tax Guard’s Solution

Enter Tax Guard. 

For more than a decade, Tax Guard has been the gold standard in federal tax data collection and due diligence for small business lenders. Using an industry-first approach to collecting data from the Internal Revenue Service, we can uncover hard-to-find information on any small business looking to secure financing. The information secured by our team surfaces all manners of potential liabilities that other due diligence offerings often miss. This can include hidden tax debts, concerns surrounding timely payment history, tax penalties, and possible IRS collection activity. Coming from the millions of federal tax transcripts that Tax Guard reviewed, 22% of SMBs have tax debts with no liens — across a wide variety of industries.

If that’s not enough of a proof point to convince lenders that tax data is critical to the due diligence process, check this out: We recently integrated proprietary data into our clients’ credit models and found that by identifying and rejecting the riskiest 10% of loans, our solution can lead to a 60% reduction in credit losses. That’s a significant amount of loss that could be easily mitigated by simply running a Tax Guard report.  

Conversely, we can flag high-risk applicants that may have otherwise gone unnoticed and support those who were unjustly rejected due to thin credit files. In doing so, lenders have the potential to expand their loan portfolios by 20%, and small businesses get firm footing in securing credit. We would call that a win-win. 

How We’re Equipping Lenders for Success in an Ever-Changing Economy

Regardless of whether the lending product being utilized is conventional or non-conventional, small business lending is inherently risky.. But it doesn’t have to be. With the right partners,  lenders can foresee exposure and mitigate risks throughout their funding relationships. 

Consider Byline Bank, a longtime Tax Guard customer. Chicago-based Byline Bank is the one of the nation’s largest SBA lenders, with close to $1 billion in assets. Being such a champion for SBA loans, the bank, before incorporating Tax Guard’s solutions into its workflow, was struggling with the additional paperwork and levels of government scrutiny that a regular loan may not require.

Tax Guard, in addition to easing the process, offered a more in-depth 10-year report of all tax debts facing borrowers in real-time, regardless of whether or not a lien has been filed. Byline Bank’s lending operation was not only eased but accelerated to same-day turnarounds when acquiring IRS data. 

Our clients’ satisfaction and success result from our nearly fifteen years of deep expertise in the industry and dedication to providing comprehensive customer support. Nine of the top ten SBA lenders in the nation benefit from Tax Guard’s astute insights into real-time IRS data. 

Read More in Our Position Paper 

Our position paper delves deep into these insights and offers a comprehensive guide to navigating this evolving landscape. Click the button below to learn more about how Tax Guard can be your partner in achieving greater lending confidence.

Posted By: David Bohrman

As the VP of Marketing, David is responsible for driving overall marketing strategy for Tax Guard including brand positioning, go-to-market execution, and lead generation programs. For the past 15 years, David has held senior positions in early growth and mature companies, leading marketing, operations, and business development teams. Prior to Tax Guard, David was the Director of Marketing of one of the largest tax consulting firms in the country. He holds a B.A. in English and Philosophy from the University of Vermont.