Overview:
How can Palau unlock better business finance for local entrepreneurs? In a new opinion piece, Professor Gustavo Pessoa explores how leveraging reliable local records—such as tax returns and expense accounts—could help small businesses overcome strict US-centric lending hurdles while keeping borrowers in control of their data.
By: Gustavo Pessoa
A business that keeps records to pay tax is also building evidence that may help a lender understand it. The connection is imperfect, but it offers Palau a practical way to improve business finance: make reliable local records easier to use in a credit assessment, with the borrower in control of their disclosure.
The IMF’s financial system study published in January describes gaps in business documentation and lending requirements shaped by US bank headquarters. It identifies US credit scores and audited accounts as obstacles for local applicants. It also notes that the 2023 tax reforms encouraged better business records. A record created for one public purpose could consequently help resolve an information problem in another.
This possibility matters because a lender assessing a small business must answer a straightforward question: what cash will remain available to repay the loan? A property title does not answer it. Neither does a promising business description. A history of sales, expenses and existing obligations provides a starting point, particularly where a firm lacks a record in a credit system designed around another jurisdiction.
Tax information alone is insufficient. Reported turnover is not profit, and accounting profit is not necessarily cash available for repayment. An applicant may have unpaid customer invoices, seasonal expenses or a large existing debt. A lender needs to reconcile those features with bank statements and other records. The objective is to make a local business intelligible, while retaining a proper assessment of repayment risk.
Palau could begin with a voluntary, standard business credit file. A participating firm would assemble its tax returns, a simple account of expenses, relevant bank statements and a schedule of outstanding obligations. Clear definitions would help distinguish amounts reported over different periods. Assistance could focus on correcting inconsistencies before an application reaches a lender, instead of producing an impressive document that fails basic verification.
The design should start with participating lenders. US bank branches cannot be presumed to accept a new local document because an authority endorses it. Their headquarters would need to confirm which information is usable, how it would be verified and what additional requirements remain. A pilot could identify where better local records change the assessment and where a separate credit policy still prevents approval.
That distinction would make the exercise valuable even when loans are refused. Applicants should receive an intelligible explanation: insufficient repayment capacity, missing information, unacceptable security or a rule governing eligibility. Different reasons demand different remedies. Collecting anonymised results could help authorities distinguish a documentation problem from a broader constraint on the supply of credit.
Privacy is essential to the arrangement. Tax compliance should not expose an entire business file to anyone claiming a financial interest. A borrower should choose which lender receives the information and understand the permitted use. Errors need a correction process. Access should have a legal basis and a limited scope, with safeguards appropriate to a small community where commercial details can identify a firm.
The IMF’s January Board assessment, which concluded the 2025 consultation, encouraged addressing structural barriers to financial intermediation. Better records would tackle one barrier, while decisions about collateral, commercial incentives and lending terms would remain. A pilot with clear results could show where documentation improves access and where other reforms are required.
A tax return should never become an automatic entitlement to borrow. It can become part of a credible account of how a business earns and uses money. If lenders can assess that account at reasonable cost, some viable Palauan firms may receive a fairer hearing. Testing that proposition with consenting borrowers and willing lenders would give policy a concrete basis for its next step.
Gustavo Pessoa is a professor of Economics and Finance at Fundação Getulio Vargas in Brazil. The views expressed are his own.