Getting a loan is often challenging for any small business, and owing money to the IRS can create additional hurdles. But is getting business financing with a tax lien on your record impossible? Not if you approach it correctly.
We talked to Vern Gohanna, MBA, EA, owner of TaxCorp LLC. Gohanna, a former IRS revenue officer whose Huntsville, AL, firm specializes in IRS tax resolution. He shared some valuable insights about what tax liens are, how tax liens affect your business’s creditworthiness, and the steps to getting funded with a tax lien—plus how to make sure you don’t end up in debt to the IRS again.
Tax liens and your creditworthiness
The federal government files a tax lien when you are delinquent on your personal or business taxes. If you’re delinquent on personal taxes, the lien is filed against your personal property; if it’s your business taxes, the lien is filed against your business property. Once a lien is filed, the federal government has first right to your assets if you liquidate them, or can even seize your assets to repay the tax debt you owe.
Personal liens don’t appear on your personal credit report, but business liens appear on your business credit report. Since both types of liens are a matter of public record, a bank considering your loan application will inevitably find out about them, says Gohanna, noting that a tax lien puts a hefty dent in your credit score. “Depending on your history and the balance, it can take 100 points off your score.”
Worse, he adds, “a federal debt on the public record freezes almost any bank from wanting to deal with you.”
But all is not lost. There are still ways to get business financing with a tax lien—it’s just that most taxpayers don’t know about it.
“People are afraid of the IRS,” Gohanna says. “They think, ‘I have a tax lien; it’s over—I might as well file bankruptcy.’ They panic and don’t investigate their options.”
Business financing with a tax lien
There are steps you can take to subordinate your tax lien so you can get approved for financing.
If you want to get a loan with a tax lien, whether business or personal, Gohanna says to start by getting into full compliance. “Make sure your tax returns are up to date and filed on time, and immediately start making federal tax deposits,” he advises.
Set up a payment plan, or see if you’re eligible for an offer in compromise to pay off the taxes you owe. Once you’ve made two or three federal tax deposits, you’re in compliance and ready to apply for subordination of your tax lien.
Subordination means the IRS subordinates its rights to your property, moving to second position on the list of creditors so the lender you’ve found can take priority.
To obtain a subordination agreement, Gohanna explains, you need to show that subordinating the lien (thus enabling you to get business financing) is ultimately more beneficial to the IRS than letting you go out of business. After all, if your business thrives, you’ll not only pay back this tax debt, but you’ll also be paying taxes for a long time to come.
Most tax professionals, including CPAs, Certified Management Accountants, and IRS Enrolled Agents, can complete Form 14134 (the application for a subordination agreement), Gohanna says. Address the situation accurately, submit all required documentation, and make a compelling argument why subordination is in the federal government’s best interests. “I’ve rarely seen a subordination agreement denied when the taxpayer can prove that having cash will help [repay the debt],” says Gohanna.
To obtain a subordination agreement, you’ll need to have a lender lined up. Most likely, it won’t be a bank. “Major banks don’t want federal tax liens in their portfolio because it raises their level of risk,” Gohanna explains. With so many qualified borrowers to choose from that don’t have liens, there’s no reason for banks to take a chance.
Where to get business financing with a lien
Instead of traditional bank loans, Gohanna says 99% of his clients dealing with subordinated liens turn to alternative lenders, such as accounts receivable financing companies. “These companies will lend you money based on cash flow, not on your credit score, your company’s net assets, etc.,” he explains. Because alternative lenders typically make daily withdrawals from your bank account to recoup the loan, solid cash flow is their biggest concern.
What if you’re already using an alternative financing source and then get hit with a tax lien? Be aware of the “45 day rule,” warns Gohanna. After the lien is filed, you have 45 days until your assets — including accounts receivable — are subject to IRS levy and can no longer be used as collateral. Before that 46th day dawns, make arrangements to subordinate your lien so your lender can take first priority in the creditor list.
Making business loans with a tax lien work
Before applying for a loan or subordination agreement, Gohanna urges business owners to take these steps:
- Stay current with your taxes. “If you start missing federal tax payments or don’t file your return on time, you’ll default.”
- Factor the cost of the loan into your profit margins. Alternative financing is easier to obtain than bank loans, but also more expensive, so you need to adjust your prices to account for the cost of the financing. “Plan effectively to either adjust your prices or cut your expenses so you’re still making money,” says Gohanna.
- Have a plan to extricate yourself from debt as soon as possible. “Don’t just daisy-chain loans back to back to back,” cautions Gohanna. “Have a plan to pay it off.”
- Have a plan for using the loan proceeds. Don’t just get a loan as a way to pay back the IRS, Gohanna advises. “Get it because it’s going to benefit your business and increase your income. Plan so when you come out of it, you’re in a better position.”
Disclaimer: Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
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