Read the latest white paper from Tax Guard.
The New Frontier in Small Business Lending:
Using IRS Tax Data to Model Credit Risk
Kenneth Posner and Steven Thompson – 2019
Summary
As this paper will illustrate, incorporating tax data into statistical underwriting models could potentially reduce loan default rates by as much as 50% and increase the volume of loans by over 20%. Savings of this magnitude have massive implications for risk-adjusted returns and the availability of credit. Put simply, tax data represents the new frontier in underwriting small business loans.
This analysis is based on data from Tax Guard, a leading provider of IRS compliance data with over 400 lenders ranging from top banking institutions to leaders in the alternative and fintech space. These firms utilize Tax Guard’s services to validate taxpayer identity, uncover hidden tax liabilities, and obtain other insights into small business loan applicants.
Key Findings
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Incorporating tax data into statistical underwriting models could potentially reduce loan default rates by as much as 50% and increase the volume of loans by over 20%.
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How businesses deal with the IRS over time provides important clues into their overall financial health and implications for how they will manage other obligations, like loans.
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Trending unpaid tax liabilities over time can help lenders follow how a small business is managing its obligations to the IRS and assess the risk that financial pressure manifest in delinquent tax payments could spread to other obligations, like loans.
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About Tax Guard
Established in 2009, Tax Guard is a leading provider of real-time IRS tax debt data and services to help lenders accurately assess credit risks associated with potential borrowers. Commercial lenders throughout the US rely on Tax Guard’s proprietary credit risk solutions both prior to financing and throughout their lending relationships.
Headquartered in Boulder, CO, Tax Guard’s integrated solutions are designed to increase a commercial lender’s profitability based on data obtained directly from the IRS.