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Can my business get funding while I have a tax lien?

Posted on May 01, 2018 in IRS Internal Revenue Service

It is a wonderful feeling in having a business that thrives, and ultimately reaching the outbound areas of growth that you never imagined. However, with business growth comes a financial burden and more taxes to pay to all entities. There is saying “if you are not paying taxes, then you are not making any serious money”, but if your business is making money and not paying taxes then you better prepare for a rude awakening.

Business owners experiencing rapid growth requires reserves of cash flow. If you are not prepared for the whiplash of suddenly running out of cash flow that may cause a default in tax obligations then be prepared for the state and federal agencies reaching out to your company and possibly dipping into your business checking account without notice.

tax lien fundingPayroll taxes is the most common tax obligation that is skipped by businesses when they run into cash flow problems. The mentality that goes through a business owner is “Id rather pay my employees and suppliers first and deal with the IRS later”. After all, if the business doesn’t make payroll or pay its major suppliers then a bankrupt business will be worthless for the IRS at the end of the day.

This statement is very accurate but be prepared for a good battle. Keep in mind the corporation is owned by shareholders and the IRS or State agencies cannot go after the stock holders for back taxes or liabilities. It is very important to incorporated the business in the event any liability arises in the company.

Taxing entities want to keep you in business and if they see the business is willing to voluntarily establish a payment plan. The business owner can make the case that the sales are X and the overhead is Y and the profit is Z and therefor the payment should be $____ this amount.

What happens when you have secured financing in place?

A major issue that will arise is when the IRS sends a notification to the lien holders of the business with a 90 day notice. In summary, the notification states that the business has a default in tax obligations and if not cured, the IRS will step into collecting out any assets it deems necessary to become whole. The IRS lien will prime through all lenders and will take action in drawing from checking accounts, collecting accounts receivable and confiscating fixed assets.

Lenders that are put into this situation will try to work out a payment plan with the IRS and if it is unsuccessful then it will begin liquidating the collateral before the 90 days is up.

Problems lenders incur in when a client goes into default with the IRS

Most non-bank lenders like factoring companies and asset based lenders have senior bank lines of credit. And just like banks, they are not able to finance receivables or assets that are under an IRS lien. However, the good news is some factoring companies and asset based lenders have more flexibility in dealing quicker, and more diligently in finding a solution before things get out of hand.

Many asset based lenders and factoring companies are privately owned, and have to abide by their bank’s lending guidelines. Any client under a tax lien obligation is deemed ineligible to borrow against. What this means is the factor or lender has to come up with its own cash to continue funding the client. This is not favorable because the client is under extreme risk and it is using funds that are normally used for leverage against their borrowing base.

What makes 1st Commercial Credit different, and how does it handle funding clients with tax lien obligations.

At 1st Commercial Credit, we understand the client’s challenges, and clients that meet certain parameters will be able to get funding when a tax lien is initiated. 1st Commercial Credit will use its own funds while our tax professionals deal with the IRS in establishing a payment plan and a subordination.

Most lenders will stop funding and liquidate the account in these situations, or sometimes move it to a lender that is able to fund under a tax lien scenario.