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Tax Lien Financing
Finding financing can be difficult even with the best credit history. For business owners with tax issues, or companies with a federal tax liens placed on a business and its assets, finding a lending partner can become all the more difficult — if not close to impossible. Fortunately, there are business funding options for company’s with open tax liens and tax liens — provided the company has a payment plan in place with the IRS, and is current on their payments. While the lending options for companies with tax liens are not abundant, there are a number of lenders that will offer additional working capital or even payoff the entire tax lien itself. Ideally, a company would try to remove the tax lien before seeking financing, as removing the tax lien would offer the opportunity to seek more traditional bank loans or to refinance an existing business loan. But, even after the tax lien is removed, it would take years to be able to qualify for SBA financing.
What is a Business Tax Lien?
A business tax lien is a formal actions by the federal government against a business who fails to make payments of their taxes in a timely manner (IRS assesses your financials, determines your payments, sends you notice of payment an payment isn’t made in a within 10 days of the IRS demand of payment). The purpose of the IRS placing a tax lien against a business or corporation (not to be confused with a IRS levy) is to protect the government’s own interests in collecting taxes in arrears, but to also warn other creditors and lending companies of the legal right by the government to the company’s assets.
Commercial Tax Lien Financing Options
While the lending options for companies with commercial tax liens are few, none are offered by traditional lenders, therefore the rates and terms are never optimal. Since the lenders who offer business financing with tax liens take a large risk, that risk is reflected in high rates and shorter terms. Comparing the lending options for company’s with back taxes:
| Rates | Terms | Funding | ||
|---|---|---|---|---|
| Alternative | 7-25% | 1-5 years | 3-7 days | |
| Invoice Financing | 1-3% | 30-90 days | 1 day | |
| Cash Advances | 1.16-1.55 | 6-24 months | 1-3 days | |
| Asset Based Loans | 8-25% | 1-3 years | 7-21 days |
Mid Prime Alternative Lending
Alternative institutional business lenders are able to provide certain businesses with tax liens, or businesses owners with personal tax liens either additional financing on-top of the tax lien, or will even buy-out the company’s tax lien (provided it saves the company money as compared to the payment plans costs). Alternative lenders are able to offer business loans with tax liens through the use of their 2nd position term loans, or a business line-of-credit. But to be able to qualify for these lenders you will need very good business credit, and exceptional cash-flow and hard assets as collateral:
- Rates: 7-25%
- Terms: 1-5 years
- Credit minimum: 600
- Good credit required
- Collateral required
Invoice Financing With Tax Liens
Invoice financing (and invoice factoring) is a way for small businesses and mid-sized companies to obtain capital even with a federal tax lien placed against the business or business owner. The lending company (or factoring company) will either use the unpaid invoice as collateral to provide funding, or will buy the invoice off of the small business at a discount. If a company has a tax lien, they can usually use that invoice to obtain financing within a day or so, and without a credit check being run.
- Credit needed: all types accepted
- Collateral: unpaid invoice
- Funding time: 1 day
Business Cash Advances
Merchant cash advance (or business cash advances and ACH loans) are the sale of a business or company’s future receivables (such as credit cards or bank deposits) for an upfront amount of funding at a discount for the purchaser. With a merchant advance funding a lender will purchase future credit card deposits, and will be repaid by having the company’s credit card processor withhold a percentage of each transaction until the lender is repaid.With a business cash advance or ACH loan, the purchaser will buy the future bank deposits and will be repaid through daily ACH remittances of a set amount until the lender is fully-paid.
- Application
- 6 months bank statements (for ACH loans, as well as MCA)
- 3-4 months credit card processing statement (for MCA loans)
Asset Based Loans
While an IRS tax lien on business assets may make the process of getting an asset based loan difficult, there are some options available. An asset based lender may be able to use a company’s assets to obtain capital to fully-payoff back taxes and have the IRS withdraw the tax lien. Businesses with tax liens looking for business financing are able to use the business owner’s own personal property (like buildings, real estate, land, equipment and some other hard assets) as collateral to receive a short term business loan or line of credit. Since there is inherent risk to the lending institution, the loan-to-value ratio is relatively low as compared to other asset based lending situations.
- Rates: 8-25%
- Terms: 6 months – 3 years
- Funding time: 7-21 days
- Collateral Required
- Fees: may be substantial
- Purchase order
