Ultimate Guide to Tax Liens and Factoring

Having a tax lien put on your business by the IRS can compromise your ability to get new lines of financing. A regular bank may turn you down because it could view you as a default risk and not worth the effort of extending a loan to you. Likewise, with a lien you may be unable to sell off assets to raise cash. The one asset that may remain at your disposal to raise money for your business could be your customers' invoices. Before you sell your invoices to a factoring lender, however, you should understand how a tax lien can affect this transaction.

Factoring and Your Financial Circumstances

Unlike a bank, a factor lender may not view you in quite the same light due to an IRS lien. In fact, the entire process of being approved for a factoring loan may center more on the credit of your client than your financial circumstances.

Still, your finances will come into play during the process, particularly if you are dealing with a tax lien. In fact, the factor lender realizes that this IRS action could prevent it from collecting a debt from you if your client fails to pay its bill. Even while you could be approved for factoring while having bankruptcy on your record or dealing with collection judgments and bad credit, you may have more of a challenge in being approved if you have a lien on your business because of back taxes.

Factoring Approval Process with a Tax Lien

The biggest challenge you may have to overcome in being approved for a factor loan centers on how much money you owe in back taxes. The lender may contact the IRS to find out whether or not the amount of money you owe is worth the risk of extending financing to you.

If the amount is not too significant and in fact quite manageable, the factor may continue with the approval, but hold out a certain amount of money to make sure that the IRS gets its payments on time each month. This action could cost you money, as the factor may charge you a fee for its monitoring of your tax lien, as well as to ensure that it has the right to claim collateral in your business.

Moreover, the lender may additionally have to contact the IRS just to make sure it is alright to buy your customer invoices. Your invoices are indeed an asset to which the IRS can lay claim. If your invoices are already claimed by this agency, you will have nothing left to use to obtain a factoring loan. As such, the factor may need written proof from the IRS that it can buy your assets without penalty or fear of breaking the law before it will extend a new line of financing to you.

Making Factoring Easier for You and Your Business

You may be wondering what you can do to better your chances of being approved for a factoring loan. The primary step you should take would be to make sure that your account with the IRS is well managed and under your control so that you appear to be more responsible and appealing to the factor lender.

For example, if you owe outstanding penalties or fees to the IRS, you should pay those first before you consider factoring your invoices. Having fees or penalties outstanding makes you seem less vigilant about your finances and even sloppy with your bookkeeping.

Next, you should try to pay some or most of the lien off if possible before factoring your invoices. Reducing the amount that you owe will make you less of a threat and more likely to be approved for this financing.

Third, you should make every attempt to remain current on this year's taxes, as well as those that you may owe in the future. The lender may want to know that you are not going to add to your existing tax burden by defaulting on this year's filing or by refusing to file altogether. While defaulted taxes can happen to the most responsible of business owners, you can make yourself and your business look better by going out of your way to avoid any future troubles with the IRS.

Last, if you have not done so already, you should ask the IRS to set you up on an installment payment plan that will allow you to make monthly payments on your defaulted taxes. While it may not remove the lien from your business, it will reduce the amount of money you owe little by little each month. This plan also shows that you are being proactive in resolving your debt and freeing your business from this obligation.

A tax lien on your business may greatly reduce your chances with a bank when it comes to getting a loan. Rather than wait for new cash sources until you pay off your IRS debt, you can learn how you can be approved for factoring and use your invoices as an asset to raise money for your business.

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