Finding Accounts Receivable Financing with a Tax Lien

Posted by Factor Funding Co. on March 30, 2017

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Taxes are a great financial burden for business owners, and a tax lien is one of every business owner’s worst nightmares. A tax lien occurs when an institution such as the Internal Revenue Service (IRS) enforces their right to keep your business’ property until or unless taxes are paid. Tax liens often happen because a business is unable to pay income or other taxes, often due to market downturns and other financial struggles.

If you are faced with a tax lien, it doesn’t automatically mean your business will fail or you will have outstanding tax debt for years. There are ways to discharge tax liens efficiently, such as accounts receivable financing. “Accounts receivable” and “tax lien” don’t sound like they should go in the same sentence. But if you know where to look and how to work with your factoring company, you can make tax liens work for you more than against you.

Get a Subordination

The first step in using accounts receivable financing with a tax lien often involves a subordination from the IRS. A subordination occurs when the IRS agrees to let your factoring company have first position on collections of receivables. In other words, the factoring company gets paid its share of receivables, such as debts from customers, before the IRS gets their share for back taxes. Your factoring company may establish contact with the IRS before speaking with you so they can obtain a subordination. While this might sound intimidating, in reality it assures you a go-between with the IRS and other tax services. Your factoring company has worked with you; they know your financial struggles, history, and how long it might take to deal with subordinations or reserves. The factoring company can use a subordination to increase your credibility. In the long run, this may save your business.

Consider the Size of Your Lien

The smaller your tax lien, the easier it will be to work with factoring companies and the IRS, and to find receivables. In many cases, your factoring company can obtain a letter of understanding from the IRS. This letter allows you and the factoring company to collect receivables as long as you remain current on taxes and set up installments for back taxes. With small tax liens, you can set up a larger reserve for IRS payment installments. You’ll pay off back taxes faster and be more likely to stay out of tax debt later because you have an easy way to deal with current taxes. Most factoring companies examine tax liens on a case by case basis and may have specific advice on decreasing your tax lien or discharging it faster.

Don’t Let the Expense Intimidate You

Some business owners don’t involve themselves with factoring companies because of the expense. Factoring companies do charge more than traditional lenders because you are promising them a portion of your receivables rather than a fixed monthly payment. The ebb and flow of receivables mean factoring companies must work harder to ensure their own security. However, don’t discount factoring companies because they’re expensive. Factoring companies are often willing to take risks on small business owners to obtain more money. Thus, they can often convince the IRS to take risks on a financially struggling business that has always paid receivables and is likely to get more once debt is discharged.

When working with a factoring company, present yourself as reliable. Focus on the receivables that have made your business the most money and will therefore benefit the factoring company. Ask how the company deals with debt, and what experience they have with tax liens. Are they willing to take risks on large tax liens and, if so, what are their financial limits? How often do they work with the IRS, and how successful have clients been in paying back taxes quickly and efficiently? If your business comports itself well and you have solid answers to these questions, your factoring company may become a huge ally in the event of a tax lien.

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