This time of year, taxes are generally on everyone’s mind—and that’s especially true for small business owners. ‘Tis the season to talk about tax liens and how they might affect your business.
If you’re not familiar with the mechanics of a tax lien, here’s how they work: Business owners who don’t pay their taxes on time will need to negotiate a payment plan with the IRS. Failure to do so will lead to a tax lien, which is a public document that asserts the government’s right to seize and sell your business property in order to satisfy tax debts. State tax liens can also be issued.
Because the type and amount of business property that can be seized is so far-ranging—it includes equipment, buildings, intellectual property, and more—creditors and prospective lenders will naturally look warily upon businesses with liens. The government, by issuing this lien, is making sure that its debts will be repaid first, sending other creditors (and any potential lenders) to the back of the line. If the business fails, creditors with lower priority might even get nothing.
It makes sense that it’s often tough to secure a business loan when operating under a tax lien. These liens can be extremely damaging to a company’s business credit and can make selling a business far more complicated, since the IRS’s approval is usually required.
But getting a business loan with a lien isn’t impossible—there are some lenders with certain qualifications and criteria who would look past one. It all depends on your business.
With that in mind, let’s review how business owners can secure a loan when they have a tax lien.
Finding the Right Lender
So, we’ve established that a tax lien makes getting a business loan far more difficult. Most traditional business lenders will simply refuse to extend credit until the lien is resolved. This means that banks are not an option. There are, though, alternative lenders that will extend credit under certain conditions.
Funding Circle, an online lender, will sometimes work with prospective borrowers who have tax liens. The company requires that borrowers be on a repayment plan with the IRS and that the terms of the plan are not so hefty that the borrower’s ability to pay back a new loan in compromised.
Funding Circle’s typical rates range from 5% to 27%, depending on credit history and other factors. Borrowers with liens will probably find themselves at the higher end of this interest rate spectrum, at least initially.
Lending Club, another online alternative lender, might work with a borrower if their lien is under a certain size and they’re following a repayment schedule.
There are other online lenders that specifically advertise their willingness to extend credit to businesses under tax liens, including Paragon Financial. There are also online services, like LendBerry, that can help line up funding sources for business owners with tax lien issues.
Not every online alternative lender will work with businesses under a lien, though. Some, like Bond Street, almost always require that an open lien against a business is resolved before moving forward.
What if a lien makes borrowing more difficult?
While a tax lien doesn’t make getting a business loan impossible, it does narrow your options considerably. Many traditional lending channels are simply closed to business owners with liens, and even some alternative lenders will decline to lend under such conditions.
But that doesn’t mean the situation is hopeless. Though the terms attached will usually be stricter—often making the loan significantly more expensive—some companies will extend credit under certain circumstances.
In order to get the best deal, business owners with liens should follow these steps:
- If you don’t have a payment plan approved, make one immediately. This is the first good-faith step toward getting your lien resolved.
- Once your plan is approved, make your payments consistently. This will be an important mark in your favor with lenders.
- Lower your lien amount as much as possible. Lenders willing to work with liens prefer them to be lower.
- Do your research. There are a considerable number of financing options out there for borrowers with liens—but business owners should proceed with caution. Make sure the lender is reputable and that you’re fully aware of the terms of the loan.
- Take advantage of federal laws. Many taxpayers don’t know this, but you can request to have a lien removed from your credit report—even before it’s paid in full. The IRS has a “Fresh Start” initiative that can help repair your credit more quickly.
- Be realistic. You’re going to pay more for this loan—probably quite a bit more. The lender is taking on an elevated risk by working with a lien attached, and will probably expect a premium return in exchange. This doesn’t mean it’s a bad deal, however!
Of course, the best practice in this case is to avoid getting slapped with a tax lien, but that’s just not always possible. Sometimes you need financing before you can pay that lien off.
Finding a small business lender willing to work under a lien isn’t easy, but that doesn’t mean it’s impossible. By taking steps to address your debt—and carefully researching and evaluating all the available options—you can find the loan that best fits the current needs of your business.
from Fundera Ledger https://www.fundera.com/blog/2016/04/28/getting-a-loan-with-a-tax-lien/