Federal Tax Liens and Factoring Loans: Protecting Your Business
- Tax Pros at LMU
- Jun 26, 2024
- 3 min read
Dealing with a Federal Tax Lien generally creates a headache for businesses, particularly when it comes to securing a factoring loan. Federal Tax Liens, which result from a business owing unpaid tax to the IRS, can make it harder to obtain financing to maintain cash flow predictability. In this blog, we'll explore how Federal Tax Liens impact factoring loans and review strategies to minimize the impact such liens have on a business.
Understanding Federal Tax Liens and Factoring Loans:
Federal Tax Liens often create a roadblock for businesses seeking factoring loans. Here's how:
Risk and Creditworthiness: Lenders, like factoring companies, assess how risky it is to lend to a business. A Federal Tax Lien signals financial trouble, making the business appear riskier. This could result in unfavorable loan terms, increased scrutiny, or loan denial, all of which strain the business's finances.
Priority and Collateral: In certain situations, Federal Tax Liens take priority over other creditors, complicating the repayment hierarchy. This affects factoring companies as they rely on accounts receivable as collateral. With a Federal Tax Lien in place, recovering funds due to a lender can become challenging, and collateral availability for other loans diminishes or completely evaporates.
Strategies to Protect Your Business:
When an IRS liability accrues, there are measures to safeguard a business against Federal Tax Liens and their impact on factoring loans.
1. Implement Tax Resolution Plans:
Act swiftly to resolve tax issues using options such as:
Installment Agreements: Negotiate an affordable payment plan with IRS to repay the liability over time.
Subordinations: Request subordination of the Federal Tax Liens to allow other creditors, like factoring companies, to retain priority on their collateral. In order for the IRS to approve a subordination for a factoring company, the business with the tax liability must have a formal Installment Agreement in place.
Lien Withdrawal Requests: Petition the IRS to withdrawal the Federal Tax Liens upon fulfilling certain criteria. Generally, Federal Tax Lien withdrawals are rare and should only be pursued in very specific situations.
2. Maintain Open Communication:
Keep lenders informed about tax issues and the steps being taken to resolve them. Transparency fosters trust and will likely lead to more favorable lending terms or accommodations during challenging times. You may consider working with a tax resolution firm to ensure that things go smoothly with the IRS and a factoring company, thereby, allowing the business owner to focus on day-to-day operations and increased profitability.
3. Conclusion:
Federal Tax Liens can pose significant challenges for businesses with an existing factoring relationship or those seeking a factoring loan. By proactively resolving IRS liabilities, businesses can mitigate the impact Federal Tax Liens have on factoring loans. Additionally, maintaining open communication with lenders about IRS liabilities and Federal Tax Liens will allow the best opportunity to avoid unexpected financial hardship. Lenders do not like surprises. With strategic planning and effective execution, businesses can navigate the complexities associated with IRS liability, Federal Tax Liens and factoring loans.
Work with Us:
Need assistance navigating tax issues, negotiating with lenders, or exploring alternative financing options? Our team at LMU Consulting Group specializes in helping taxpayers manage tax challenges and facilitate productive conversations with lenders. With our expertise and personalized approach, we can guide your business through complex tax situations, mitigate risks, and identify strategic solutions tailored to your needs. Contact us today to learn more about how we can support your business's financial long-term success.
