How to Prepare for Tomorrow’s Credit Risks Today Published September 13, 2019

Winter is Coming: Game of Thrones Meets Federal Tax Data

As the U.S. economy prepares to enter the 10th year of the current economic expansion, memories of the Great Recession are fading. Buoyed by stable interest rates, small and medium-sized business loan approval rates are rising.

In fact, big banks approved small business loans at a record clip of 27.3 percent in March of 2019. What’s not to like? The potential for sunny economic times to slide into a bleak recession, limiting borrowers’ ability to repay the loans they just received.

This is not just speculation that the weather will turn. Commercial debt has rapidly ballooned to record levels, leaving the Fed to sound the alarm that the business sector is increasingly unstable.

Which means it’s past time to prepare for the lending winter that is just around the corner.

SMBs fail at a clip of 20% a year

While you don’t have to worry about the White Walkers breaching your defenses, you should be concerned about the rising probability for recession. (For the Game of Thrones uninitiated, the White Walkers are the terrifying ice zombie antagonists of the human race). Economic indicators are flashing yellow across the board, in areas from retail to trucking to manufacturing. Not to mention the scary inverted yield curve that showed its ugly face in March.

When it comes to recessions, the best defense is a good offense. Mitigate repayment risk by vetting your applicants through an evolved due diligence process, informed by proprietary tax data that can serve as a leading indicator of business failure.

SMB Loan Defaults Soar During Recessions

When economic conditions sour, small and medium-sized businesses feel the pinch. In fact, Small Business Administration (SBA) loan default rates climbed sharply in the four years between 2004 to 2008 from 2.4 percent to 11.9 percent.

Loan defaults weren’t the only issue; 170,000 small businesses failed between 2008 and 2010. Banks and lenders followed right behind, with 500 banks failing between 2008 and 2015, an increase of 200 percent from the previous seven years.


SBA loan failure

rate during the Great Recession

There’s no way to know when or how severe the next recession will be. Some of the top online lenders such as Kabbage, BlueVine, and LendingClub are discussing their preparations for what they fear could bring escalating credit losses to the small business lending industry.

Don’t wait to act on the proactive vetting of lending prospects until it’s too late.

Solve with Tax Data for Business Intelligence

Armed with proprietary tax business intelligence, your financial institution gains the capacity to dive deeper into prospective borrower’s true financial health. Understanding your borrower’s tax compliance obligations at a more granular level provides you with the tools you need in order to evaluate credit risk more effectively.

This tax data is especially important when it comes to evaluating small and medium-sized business credit applications because they typically boast thin credit files compared to consumers. Unlike consumers, whose payment histories are tracked by credit bureaus, there is no repository for business data with any depth of coverage like the IRS. All businesses have a thick “credit file” within the single source of truth, the IRS, regardless of what’s reported in the public record.


of all businesses

across all industries

have a hidden,

non-public tax debt with no lien filed

Unfortunately, many lenders rely only on public IRS lien data to assess credit risk. Such data is a lagging indicator that can lead underwriters astray when evaluating a businesses’ ability to repay a loan. Tax Guard’s proprietary data reveals that 22% of all businesses across all industries have a hidden, non-public tax debt with no lien filed.

Fortunately, such comprehensive federal tax data, which many lenders fail to consult during the underwriting process, provides a detailed record across a company’s lifecycle. This data includes:

  • All tax debts
  • Tax payment history
  • Tax penalties
  • Enforced collection activities

When hidden unpaid tax debts are uncovered, the symptom of a cash flow “disease” within a business is revealed. A lender’s understanding of cash flow is critical, especially given that 82 percent of business failures are due to cash flow problems, impacting loan payments and potentially endangering business solvency.

Do You Really Know Your Borrowers?

As the business cycle nears recession territory, there’s no time to waste to do all in your power to ensure that the borrower you lend to today is the borrower who will repay you tomorrow. The lending winter may be coming, but there’s no reason to be left in the cold.

Debts and cash flow risks surface in private IRS records before they show up in credit bureaus and public data aggregators. Arm your credit risk team with the latest tax business intelligence so that they can make the most confident credit decisions possible.

To discover how leveraging our tax expertise can protect you from credit losses and fraud, schedule a demo today.

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.