Though there are unavoidable consequences to having a tax lien, such as a more limited selection of lenders and higher interest rates, you can get a small business 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 tax 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, tax lien notwithstanding.
We’ve included some money-saving tips, too, so you can put yourself and your business on the path to financial success.
Unfortunately, having a tax lien on your record will inevitably make getting a business loan more complicated.
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 won’t completely dash your hopes for business funding. There are alternative lenders who will extend credit under certain conditions, and there are steps you can take to improve your chances of getting approved.
Here are some pointers for 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 in the past, 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, and make the loan you ultimately qualify for much more affordable.
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.
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.
The stronger you can make the rest of your business loan application—aside from your tax lien—the better. Getting a business loan with a tax lien will be near impossible if you’re not able to prove your ability to repay potential debt to a lender. Whether with a stellar personal credit score, a top-notch business credit history, or abundant cash flow, be sure to emphasize the strengths of your finances.
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 IRS, which is the government agency that files the majority of liens, offers three main repayment plans:
Borrowers who have a tax debt under $50,000 can pay off their debt in monthly installments over a six-year period. There are installment plan options for larger debts as well.
If you cannot pay off the entire debt, you might be able to settle the debt by paying as much as you can afford. The IRS will review your business’s revenues and other sources of income when determining your ability to pay.
The IRS typically files liens only when you owe more than $10,000 in taxes. If you manage to pay off any amount greater than that, you can request the government to withdraw the lien.
Even when you’re on a repayment 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.
Online, alternative business lenders are a diverse bunch—they provide term loans, short-term loans, invoice financing, and business lines of credit, to name just a few offerings. The common element is that they work with less qualified borrowers than banks are willing to work with. These lenders can overlook weaker credit histories, lower business revenues, and even tax liens under certain conditions.
“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 context 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.
Still other alternative lenders might consider your tax lien relative to the amount of funding you request, and they’ll only provide loans against which a borrower’s tax lien is only a certain percentage.
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.
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. As a result, 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 will 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.
Though 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—like, say, an SBA lender—finds a tax lien on your record, they might reject you right away. But other, more flexible lenders—like the ones we highlighted earlier—don’t consider tax liens automatic disqualifiers.
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.
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.