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Your financial history’s impact on your ability to get a small business loan is undeniable. When you have excellent credit and a record of managing your finances well, a large number of business loan options are at your disposal. But if you have bad credit or other red flags in your financial history, many lenders won’t want to work with you. Getting a business loan with a tax lien can be especially difficult.
If you’re one of the nearly 14 million Americans with a tax lien or judgment on your record, you might think it’s impossible to obtain small business financing. And although there are unavoidable consequences to having a lien, such as a more limited selection of lenders and higher interest rates, you can get a loan with a tax lien. (We know, because we’ve helped small business owners get the funding they need to grow their businesses, even with a lien.) But finding the small business loan is the most challenging part, because you need to know which lenders to work with, plus how to minimize the impact of a lien.
Here’s everything you need to know about getting a business loan if you’re a small business owner with a tax lien. We’ll also guide you through how to search lien records, which lenders to consider, and the options for obtaining a business loan. We’ve included some money saving tips, too, so you can put yourself and your business on the path to financial success.
A tax lien is like an “IOU” to the government. When you owe more than $10,000 in taxes, the government will file a written claim to your property with the county clerk or secretary of state’s office. If you then sell or liquidate the property, the lien gives the government first rights to the money. And if you don’t pay back the taxes for a long time, the government will eventually enforce the lien by seizing and selling your property to satisfy the debt.
The government typically files a lien on personal property—like a house, car, or personal bank accounts—when an individual is delinquent on their personal income taxes. If you’re late on your business taxes, the government can file a lien on business property. This includes equipment, buildings, intellectual property, accounts receivable, and more.
The federal government (IRS), as well as state and local governments, can file liens on property. All of these liens become part of the public record, where lenders can easily find them. As a result of the lien, the government gets priority, sending other creditors (and any prospective lenders) to the back of the line. If your business fails and you default on a loan, creditors with lower priority might even get nothing. So, lenders are naturally wary of lending to borrowers who have liens.
In addition, until you pay off the tax debt, the government assesses interest and late penalties. A lien can negatively impact your cash flow and overall debt burden—other factors that lenders look at when deciding whether to approve you for a business loan.
Until recently, consumer credit reports contained tax lien data, but credit bureaus removed all tax liens from credit reports in April 2018. So, tax liens no longer affect your credit score—which means that you might have experienced a boost to your raw credit score. Great news for that number—but that doesn’t mean lenders can’t find out about a lien or that having one won’t affect your business loan search.
Lenders still search for liens during business loan underwriting. A lien is one piece of data that separates a strong borrower from a riskier borrower, so lenders want to have this information before they approve a loan.
Although lenders can no longer obtain lien data just by pulling your credit report, they can still find liens in one of three ways:
If a lender finds a tax lien on your record, they might reject you right away. But other lenders might be receptive to working with you.
→Too Long; Didn’t Read (TL;DR): The government can file a lien on your personal or business property if you or your company fail to pay taxes. The lien harms your ability to get financing because the government has the first claim to your assets. Although liens no longer show up on credit reports, lenders can find them in other ways.
Having a tax lien on your record makes getting a business loan far more difficult. Most traditional business lenders will simply refuse to extend credit until your resolve the lien. This means that banks are not an option. However, having a lien isn’t a complete deal breaker. There are alternative lenders who will extend credit under certain conditions and steps you can take to improve your chances of getting approved.
Here are some pointers when trying to get a business loan with a tax lien:
Your first step as a prospective borrower should be to verify that any liens on your record are accurate. The IRS has made errors when filing liens, and state and local agencies could also make errors. For instance, the government might report the wrong amount of outstanding taxes, or they might fail to release a lien after you pay the amount due. Correcting these mistakes can make your search for a business loan much easier.
After the recent credit report changes, you no longer have to worry about lien errors on your credit report—lien information won’t show up there at all. However, there are a number of government agencies that record liens, so it’s important to correct inaccuracies.
Start by contacting your county clerk, recorder, or assessor’s office to sift through lien records. All you need is your residential and business address to check for liens on real estate. The process varies for other types of liens. If the government filed a lien on your car, for instance, you can find out by contacting the DMV.
If you receive a notice of lien from the IRS or another government entity and believe there’s been an error, follow the steps in the notice for correcting mistakes.
Online, alternative business lenders are a diverse bunch—they provide medium-term loans, short-term loans, invoice financing, and merchant cash advances. The common element is that they work with less qualified borrowers than banks. These lenders can overlook weaker credit histories, lower business revenues, and even liens under certain conditions.
Many alternative lenders are okay with liens under a certain size. “Usually, liens under $250,000 are less of an obstacle,” says Michael Yang, a small business loan specialist at Fundera. Other lenders view the lien through the lens of your annual business revenue. Liens that are smaller than 7% to 10% of your annual revenue are more likely to make it through a lender’s underwriting process.
The size of the lien affects the likelihood that the lender will get their money back if you default on the loan. There will likely be money left over for the lender after the government gets its due if the lien is for a small amount of money.
If you have a lien, the rest of your application should be as strong as possible. Lenders prefer that you’re cash flow positive if you have a lien on your record.
Since alternative lenders work with borrowers who have a higher risk profile, they charge more. Expect annual interest rates in the range of 10% to 80%, which is 2 to 10 times higher than what banks customarily charge. Alternative lenders also tend to charge higher origination fees, prepayment penalties, and other fees. These all factor into the total cost of your loan, so make sure you understand exactly what you’ll be responsible for paying back.
See If You Qualify for Alternative Lending
One of the best ways to get financing with a tax lien and put yourself on the path to financial recovery is to arrange a repayment plan with the government agency that filed the lien. If you’re on a repayment plan and cash flow positive, alternative lenders and even some SBA lenders might approve you for a loan.
The procedure for arranging a repayment plan varies based on which government agency filed the lien, how much money you owe, and the type of property that’s subject to the lien.
The IRS, which files the majority of liens, offers three main repayment plans:
Visit the IRS’s website to learn more about repayment plans and to apply online. Note that it’s best to enter into a repayment plan as soon as the government notifies you that you are overdue on taxes, before they file a tax lien. But better late than never. The government would much rather receive repayment from you than go through the hassle of enforcing a tax lien.
Just remember that tax debt is like any other debt. You’ll need to pay interest on the debt (and any penalties that the government assesses) while you’re on the payment plan. Lenders will account for the tax debt when calculating your overall debt burden and cash flow. “If your total debt—tax debt included—is too high,” explains Yang, “then you won’t be able to qualify for the loan, even if you’re on the repayment plan. The lender always wants to make sure you can afford your monthly payments.”
So, a repayment plan is no guarantee that you’ll qualify for a business loan, but is a good way to minimize the impact of a lien. Once you’ve set up a repayment plan, the government will give you a document that contains the details. This is what you’ll need to show lenders to prove you’re on a repayment plan, so keep it safe (replacing this document can be time consuming).
The best way to get past a tax lien is to pay off the tax debt in full before applying for a business loan. Once you pay the outstanding debt, the government will send you a certificate of release to prove that you’re in the clear. At that point, many more business loan options become available to you, including bank financing.
Ideally, you want to pay off a tax debt with excess business revenues or personal funds. However, if that’s not an option, another possibility is to use a personal or business credit card to pay the delinquent taxes. Some cards even have a 0% APR introductory interest rate for up to 15 months, so you don’t have to pay interest to the issuer during that time.
There are two big caveats here. First, the IRS charges a payment processing fee when you use a credit card to pay taxes. Second, you should definitely have a plan for paying off the credit card debt once your introductory rate expires. Otherwise, you could be left with more debt than you started with.
→TL;DR: Contact your county clerk to find out if lien records are accurate. After that, approach alternative lenders, who usually work with borrowers who have liens under a certain size or who are on a repayment plan. These lenders can be expensive, so the best solution is to pay off the lien in full.
If you manage to get a business loan with an outstanding lien, chances are good that the lender will charge a high interest rate. However, you’re not “stuck” in an expensive loan product. If you’re able to pay off the tax debt with surplus business revenues, then you might be able to refinance the expensive loan with a more affordable product.
Yang says, “While the lien is outstanding, we try to get the borrower into the best product they’re eligible for at that time, such as a short-term loan. If the borrower pays off the tax debt and the government releases the lien, we can sometimes refinance the debt with a more affordable loan, such as an SBA loan.”
The advantage of this approach is that you receive the capital you need right away—through a lender who has easier qualification requirements and is willing to overlook the lien on your record. You can begin investing the capital in your business immediately. However, once you pay back the tax debt and resolve the lien, you might be able to “graduate” to a more affordable loan product.
→TL;DR: Having a lien might limit you to an expensive loan product. But, once you resolve a lien, you might be able to save money by refinancing.
Although a tax lien doesn’t make getting a business loan impossible, it does narrow your options considerably. Many traditional lending channels are simply unavailable to business owners with liens. But that doesn’t mean the situation is hopeless.
Here’s what to keep in mind if you’re trying find business financing with a lien on your record:
Finding a small business lender who is willing to work with a lien isn’t easy, but it’s possible. By taking steps to address your debt—and carefully researching and evaluating all the available options—you can find the loan that best fits the current needs of your business.
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