By: First Union
Why it might be harder to get a business loan with personal tax liens
Owing the IRS, aside from the frustration of it all, can complicate the business loan process. This is not to say that you can't get a business loan if you do have a personal tax lien, but it does make the process a bit harder. Generally speaking, if you have a tax lien as a result of unpaid back taxes, most banks will not be an option for a business loan. It's simply too much of a risk for them. And certainly, you can apply, wait weeks or months, turn in all requisite paperwork, but odds are very good that your application will ultimately be rejected.
If you are in a situation in which you're hindered by some sort of tax lien, personal or otherwise, your best bet is going to be an alternative lender. Because online and alternative lenders have more flexibility and their hands aren't necessarily tied by the same constraints as traditional banks, they may be willing to work with you and offer your company financing. Below is a brief guide to navigating the business loan process even if you happen to have a tax lien filed against you.
What Exactly is a Tax Lien?
Usually, a tax lien is not filed unless you owe the government $10,000 or more. And even then, they may not always go to the level of lien. If they do, however, you should know that your personal property is subject to government seizure if you do absolutely nothing about the lien. Essentially, the IRS will file a lien against your home, your bank accounts, even your car. When you go to sell or liquidate, the government gets first dibs. And again, if you take no steps to try and resolve the debt, they may eventually try and forcibly seize your property and/or accounts in order to reclaim their money.
Same goes for your business. If a lien is filed against a business, this makes any business assets such as real estate, equipment, or accounts receivable vulnerable. In an ideal world, you are able to pay all taxes on time, clear up any back tax debt easily, and no such lien will be filed. This, however, is not always the case and so if you do have a tax lien filed against you, there are steps you can take to try and improve your chances of getting funded should you require a business loan in the near future.
What You Can Do in the Event a Tax Lien is Filed Against You
Keep in mind, a tax lien is filed with your county clerk's office—in some instances, it's the secretary of the state in which you live. You want to make sure that the records associated with the filing are accurate. That is to say, the IRS is not infallible—they have made mistakes in the past. Double check and make sure that the stated amount owed is correct. Also, if you do manage to pay it off, ensure that the lien is then released. Staying on top of your own records and essentially advocating for yourself here is absolutely critical.
You then want to contact the IRS and see what options you have. The IRS may have filed a lien, but ultimately they will work with you if you do not have the money to pay it in full—they tend to take the "something is better than nothing" approach in these cases. There are a couple of solutions open to you at this point as far as your dealings with the IRS go:
Offer in Compromise. An offer in compromise can be a lengthy process, but it also can drastically reduce the amount of money you owe the government if approved. Basically, you submit paperwork stating what percentage of the debt in question you can afford to pay back and the IRS will start its review process to see whether or not they will accept the offer, counter the offer or simply reject the offer. Keep in mind, the number of offers in compromise they accept yearly is only around 40%, but depending on your financial circumstances, it may be worth a shot. There is quite a bit of paperwork (and waiting/) involved with this process though.
Installment Plan. Perhaps the most popular route that many who owe the government take are the installment plan option. This requires far less time and paperwork than an offer in compromise—in fact, it usually is just a matter of a phone call and in some instances, you may be able to set it up online. Generally, you're looking at a six-year period during which you pay a set monthly amount. The amount is established based on your income and what you can afford to pay after living expenses.
Try and bring the debt under $10,000. In some instances, if you can bring that debt down under the 10k mark, you might be able to request that the government drop the lien. There is no guarantee that they will do so, but it is certainly worth trying.
Hire a tax attorney. There are plenty of attorneys and legal firms out there who specialize in dealing with the IRS, particularly in dealing with back tax issues. Yes, you might have to spend anywhere from $2-6,000 or possibly more, but if they can help eliminate a significant portion of the debt, it could be worth your while.
Applying for a Business Loan with a Personal Tax Lien
Hopefully, you are able to make some sort of an arrangement with the IRS. And if you simply cannot wait to apply for a small business loan until after the debt is paid off, then there are some things you can do to improve your chances of being approved.
While liens no longer go on your credit report (good news for your credit score/), there are still ways that potential lenders can find the existing lien. They can take the time to search public records/county clerk databases. They might also look into working with a third party who does nothing but scan public records for lien notifications. When applying for your loan, your best bet is, to be honest in disclosing any tax liens against you.
That said, you want to make sure that the rest of your loan application is rock solid. Where does your credit score fall? How does your profitloss statement look? Do you have a solid business plan to present to the lender? Is your annual revenue where it needs to be? What do you plan to do with the funds and can you show how this will benefit the company? How about cash flow? All of these, if they are positive need to be highlighted in your application to help counter the impact of that tax lien. And especially if you have a repayment plan in place and can show proof—this is also quite helpful.
As mentioned earlier, with a traditional lender, odds are your application is a no-go. Focus your efforts on alternative and online lenders who specialize in helping smaller businesses who may have some check marks against them. They will look at the tax lien more holistically, meaning, in relation to what your company makes…If it's less than 10% of your annual revenue then your application has a good chance. Or, they may look at the amount owed with respect to the amount of funding requested. The point is, alternative lenders have the flexibility that banks don't have; they have the capacity to invest in less qualified smaller businesses and the resources to do so.
First Union will frequently take risks on those who may have tax liens stacked against them. We look at the entire picture, not just one piece of information. Our lines of credit, short-term loans, bridge loans, and merchant cash advances, may be exactly what your company needs, so don't let a personal tax lien stop you from applying. Call us today and let's figure this out together!