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Since e-commerce businesses can struggle to find appropriate and affordable financing to begin with, it is especially important to understand tax liens and their implications for your online business.
This time of year, taxes are top of mind for consumers and business owners alike, but few people like to think about tax liens. Tax liens are serious business and can have a significant impact on your credit and ability to secure financing. Since e-commerce businesses can struggle to find appropriate and affordable financing to begin with, it is especially important to understand tax liens and their implications for your online business. There are two types of tax liens that can be levied by the IRS (personal and business) and there are two ways business tax liens can be triggered.
Types of Liens and their Triggers
Personal tax liens are placed against people who, quite simply, don’t pay their personal taxes. Business tax liens are levied when a business owner either doesn’t pay normal taxes owed or fails to pay quarterly payroll taxes for their employees. Either way, the IRS frowns on this practice and will go to great lengths to get its money.
Regardless of which type it is, a tax lien is a legal claim to your property and the IRS files a Notice of Federal Tax Lien in public records, which immediately and negatively impacts your credit. As a public record, all existing and potential creditors see this information when pulling your credit report. And if this isn’t bad enough, daily interest and monthly penalties are tacked on to the original amount owed, growing your tax obligation very quickly, and that can become hard to manage.
How Can I Grow with a Tax Lien?
So, does this negative mark mean you are blacklisted from borrowing? Well, yes and no. If there’s a tax lien against you or your business, no traditional banks will touch you; you are now “unbankable”. However, alternative online lenders may be able to help. Tax liens can be a black cloud hanging over your head and can seriously impact the creditworthiness of your business. We can often work with business owners to get them out from under that cloud with more affordable options than the IRS provides.
When it comes to business owners who have personal tax liens levied against them, there may be hope. Alternative lenders consider multiple factors when deciding whether or not to extend credit to small business owners and some will extend credit in a second lien holder position behind the IRS if the business otherwise qualifies for financing. A business owner who is on a current IRS payment plan for a personal lien may still be eligible to receive financing. A history of consistent, on time payment of a debt obligation through an IRS payment plan, shows the lender that the business owner is reliable and taking responsibility. However, if a business owner is “trying to work it out with the IRS”, most lenders will take a hard pass.
Business tax liens will need to be completely paid off before additional financing can be approved. The only way we can provide financing to someone with a business tax lien is to give him or her a term loan to pay off the balance, thereby eliminating the lien. By providing a loan with better interest and repayment terms than what borrowers have with an IRS repayment plan, we can help them get out from under what can be a crushing obligation, both from a cash flow and credit rating perspective. If the borrower qualifies for even more than the amount of taxes owed, he or she will have access to additional business capital needed to continue to fund the company’s growth, something most small to medium-sized businesses need.
An ounce of prevention is worth a pound of cure
The bottom line is this: Tax liens are no joke. Unfortunately, many people mistakenly believe they are no big deal. Many potential borrowers tell us that they have no outstanding debt and then when we pull a credit report, the tax lien is right there for the world to see. It’s amazing how many people don’t think they are something to be concerned about. Nearly three-quarters of the liens we run into are for nonpayment of payroll taxes. A surefire way to avoid that type of lien is to consider using a payroll service that collects and pays those taxes for you, saving time and headache. And to avoid nonpayment of income taxes, considering a business loan ahead of time is far preferable to waiting until a lien is levied, not to mention cheaper since there will be no crippling interest and penalties tacked on to the original debt.
Avoiding a tax lien in the first place is preferable to having to pay one off. Taking steps ahead of time to avoid finding yourself embroiled in a tax lien is your best strategy. If you find yourself unsure of your ability to pay your tax obligation in full as the quarterly or annual tax deadlines are looming, consider looking into a business loan ahead of time. Remember, it’s easier to get a loan without a tax lien than with one in place.
In the end, the IRS will get what they are owed. But that doesn’t mean tax liens preclude you from getting small business financing. You just need to know where to look.