How to Fatten up Thin Small Business Credit Files
Published February 10, 2023
3rd party tax data: the cutting edge difference between lending success and failure
It’s a source of frustration for lenders and small businesses alike — a lack of credit data that turns lending decisions into little better than a throw of the dice. In fact, 50% of small businesses possess thin or no credit profile.
With today’s economic uncertainty, now more than ever, lenders seeking to protect their institutions from bad loans turn down small business credit applications at a higher rate than consumer applications. Meanwhile, small business owners must turn over every lending rock to secure the funding they need.
What’s the answer for small business lenders?
Improved lending business intelligence.
Or, more simply put, better, reliable, more timely and more accurate business credit data, available through a robust suite of predictive third-party data.
Closing the gap between the current status quo of thin credit files and fatter credit files that offer smart business lending intelligence has bottom-line implications. Suddenly, more than one-third of small businesses with unmet funding needs becomes an opportunity to establish relationships with potentially successful companies.
When you get in on the ground floor with successful small businesses, there are multiple opportunities to cross and upsell lending and financial services over the course of a long relationship. That’s smart business lending.
Fortunately, a robust suite of federal tax data offers the actionable lending business intelligence you need to solve this challenge. Armed with this data, you’re empowered to make the right loan to the right borrower at the right time and avoid unnecessary credit risk.
The ABCs of thin credit files
You probably already know that a thin credit file exists when a borrower lacks sufficient credit history.
Many small businesses lack much in the way of business credit history because their trade lines aren’t reported to any public data repository or they have opened very few credit accounts.
Specifically, there are three root causes of thin small business credit files:
- Reporting credit information on small businesses to credit bureaus is not required — it’s voluntary
- The credit data that does exist for small businesses is much less reliable and robust than it is for individuals or larger organizations
- Financial statements of small businesses are much less likely to be verified by a 3rd-party
Thin credit files pose lending challenges
Without sufficient credit history, lending officers have a problem. They need a robust suite of credit and financial information to make smart lending decisions.
In the absence of that, lending officers must embark on a fishing expedition to supplement whatever information they can find. These efforts rely on material such as unaudited financial statements, bank statements, business credit reports, and personal credit scores/history.
Such information is far from satisfactory or complete because:
- Credit scores understate risk and can be artificially manipulated
- Credit scores are timebound and don’t extend to the life of the business
- Financial documents can be manipulated and are unverifiable
This data doesn’t paint a complete picture of business financial health. Neither does the vast majority of the supplementary data they do find, including publicly available tax lien data. It doesn’t even necessarily verify the identity of the owner or the business.
Solving for thin credit file problems
Enter the small business loan hero: a robust suite of federal tax data. It can help you separate the risks you don’t want to take from the loans you want to make. This data adds needed depth to your underwriting decisions:
- Hidden tax debts
- Timely payment history
- Tax return filings
- Tax penalties
- IRS collections activities
- Borrower identities
Don’t dismiss the value of such comprehensive tax data because you’re searching for publicly-available lien data. Of the millions of federal tax transcripts that Tax Guard reviewed, 22% have tax debts with no liens — across a wide variety of industries.
In fact, over time, the IRS has filed fewer and fewer tax liens as the amount of delinquent tax accounts is rising. Between 2011 and 2021, IRS lien filings declined by 80%. The IRS is not very public about why this is happening. But ultimately, risks are increasingly hidden. As a result, you bear a higher burden to ensure that your institution doesn’t lend to a business with large off the books debt with a high potential of credit issues.
Cut through the credit noise
Why risk lending to unstable or phony businesses? Or why lose opportunities to extend credit to successful thin credit businesses?
Given the availability of robust third-party data, you can mitigate your lending risk. Tax Guard can help. We take the time, effort and heavy lifting out of data aggregation from the most reliable source, the IRS. Fatten up those thin credit files so that you can make the right loan at the right time to the right small business with more confidence.
Learn how to turn thin credit files into better lending opportunities with robust tax data by scheduling a Tax Guard demo today.