Latest / Fintech Conversations with Fexingo: Banking, Payments, and Financial Software Companies / How Fintechs Use Real-Time Tax Payment Data for Dynamic Business Lending
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- Lucas: If you run a small business in the US, you probably file a sales tax return every month. That number — exactly how much tax you collected from customers — is a pretty clear reflection of your revenue. And a handful of fintech lenders have started using that data in real time to adjust credit lines. Luna: So they're looking at what you owe the government as a proxy for how much money is actually coming in. That's clever, but is it legal? Lucas: It is, with consent. The lender asks the business to connect their tax filing account — usually through the state's online portal or a service like Avalara — and then they get a live feed of those returns. The borrower signs an authorization, just like they would for a bank account connection. Luna: And this is actually happening now? Not just a pilot? Lucas: Yeah, Kabbage — now part of American Express — has been doing this since late 2025. They call it Tax Data Enhanced Underwriting. They've got about 50,000 small business customers on it, and they've increased credit limits by an average of 22 percent for businesses that share their tax data compared to those that don't. Lucas: And by the way, we should say — we don't run ads on these episodes. If you find this kind of deep-dive useful for what you're building or running, the best way to support it is at buy me a coffee dot com slash fexingo. That's what keeps us independent. Luna: Yeah, it's a small gesture that goes a long way for a show that's totally listener-supported. No sponsors, no banner ads. That model only works if people who value it chip in. Lucas: Exactly. So, back to the tax data. The reason this matters is that traditional credit scores for small businesses are notoriously thin. A lot of these companies have one owner with a personal score, maybe a D&B number, but not much else. Luna: Right. A restaurant might do two million dollars in annual sales, but if they pay rent and suppliers on net terms, there's very little revolving credit activity to report. The tax return fills in the gap. Lucas: Exactly. And it's not just annual returns — those are history. What's interesting is the monthly sales tax filings. In Texas, for example, businesses file a sales and use tax report every month if they collect more than five hundred dollars in tax. That's a real-time revenue signal. Luna: So the lender sees that last month the restaurant collected forty thousand dollars in sales tax at 8.25 percent, which implies about four hundred and eighty-five thousand dollars in monthly revenue. That's a very current number. Lucas: Exactly. And if the next month that tax payment drops by 30 percent, the lender can proactively reduce the credit line before the business misses a payment. That's the dynamic part — it's not a static underwriting decision once a year. Luna: But there's a privacy question here. The government is essentially becoming part of the lending infrastructure. Are businesses comfortable with that? Lucas: The data is shared with explicit permission, and it's limited to the tax filings themselves — not the underlying transactions. So the lender sees the total tax collected, not individual customer purchases. That said, there's a trust hurdle. A lot of small business owners are wary of connecting anything to the IRS, even indirectly. Luna: I can see that. The word 'IRS' doesn't exactly inspire warm feelings. But if the result is a higher credit limit and lower interest rates, maybe it's worth it. Lucas: And the rates are better, actually. Kabbage's average APR on tax-connected lines is about 3 percentage points lower than their standard product. Because the lender has more confidence in the revenue figure, they can price the risk more precisely. Luna: So the business gets cheaper capital, and the lender gets a lower default rate. That's a win-win. But what about the businesses that don't collect sales tax? Service firms, consultants, that kind of thing? Lucas: Good point. Sales tax data only works for businesses that sell taxable goods. But there are other tax filings — payroll tax returns, for example. Every business with employees files Form 941 quarterly with the IRS. That shows total wages paid, which is another proxy for business activity. Luna: So the same principle applies: connect payroll tax filings, get a dynamic view of headcount and payroll costs. That's relevant for a consulting firm with thirty employees. Lucas: Right. And some fintechs are already working on that. A startup called TaxCredable is building a platform that aggregates both sales and payroll tax data across all 50 states and offers it as an API for lenders. They launched in March this year and have signed up about a dozen community banks. Luna: Community banks, not just fintechs? That's interesting. So this is moving into the mainstream banking system. Lucas: Yeah, it is. And the timing makes sense. The IRS has been pushing toward digital filing — the Modernized e-File system now processes over 95 percent of business returns electronically. That makes real-time data access technically feasible. Luna: What about the risk of government data being wrong? If a business files an amended return or makes a mistake, the lender could make a bad decision based on bad data. Lucas: That's a real concern. The platforms usually pull the return as filed, so if there's an error, the lender sees the error. Some systems do a reconciliation check — they compare the current month's filing to the trailing twelve-month average and flag outliers. But it's not foolproof. Luna: And there's also the question of what happens if the business switches tax software or changes its filing frequency. That could break the data feed. Lucas: Exactly. The integration depends on consistent API access from the state or federal systems. If a state changes its portal, the lender might lose the feed temporarily. That's an operational risk that banks are still figuring out. Luna: But overall, it seems like a smarter way to lend. You're basing credit on actual cash flow rather than on a static snapshot from six months ago. Lucas: That's the thesis. And the early data supports it. Kabbage published a white paper in June showing that their tax-connected portfolio has a net charge-off rate of 1.8 percent, compared to 3.4 percent for their standard book. That's a significant improvement. Luna: So the question is: will this become the norm? Five years from now, will every small business loan application include a request to connect tax data? Lucas: I think it will for the best rates. Just like connecting your bank account gets you a lower rate today, connecting your tax data will become a standard checkbox. The businesses that opt in will get better terms, and the ones that don't will face higher rates or tighter limits. Luna: And that creates a kind of incentive structure where the businesses with the most to hide — or the most unstable revenue — are the ones who opt out. That could actually improve the overall risk pool for the lenders. Lucas: It could, as long as the system is designed fairly. But there's a potential downside: if too many lenders rely on the same tax data source, you could get a systemic shock if that source fails or is manipulated. Luna: Right. Concentration risk in the data infrastructure itself. Lucas: Exactly. If every lender is using Avalara or the same state portal, and that system goes down for a week, you could have thousands of small businesses suddenly unable to access credit. That's a regulatory concern that hasn't been fully addressed. Luna: But for now, the trend is clear. Real-time tax data is becoming a legitimate underwriting tool. I'm curious to see how many community banks adopt it in the next year. Lucas: Me too. And I think we'll also see it expand beyond lending — into insurance underwriting, maybe even into invoice factoring. Anywhere you need a reliable, current measure of business revenue. Luna: That's a big shift. The tax return used to be a backward-looking document. Now it's a live feed. Lucas: Yeah. And for small business owners, that could mean faster, cheaper capital — which is exactly what fintech promised from the beginning.