Fundera Practice Management Small Business

How a Tax Lien Affects Your Client’s Financing Options

Written by Meredith Wood

We all know that tax liens pose problems for business owners. As a tax professional, you’re used to helping small business clients navigate the often tricky world of business loans. You’re also used to the ins-and-outs of small business tax liens. Put the two together, and you’ve got a less common—and more difficult—situation to contend with. It can be a pretty tall order to get business financing with a tax lien, and offering the right kind of help is even harder.

Tax liens can destroy cash flow, hurt operating budgets, and act as a red mark on any funding application. As a result, few traditional lenders will offer a business a loan until they resolve their lien, making it a little more difficult for a small business owner to fund a big purchase or growth spurt.

But a tax lien doesn’t inherently disqualify your client from getting financing—it merely narrows their options. There are still several ways in which a business with a tax lien can get a loan. Here’s how you can help them get the best loan to fit their needs.

How a Lien Affects a Business Loan Application

Whether the lien is against your client or your client’s business, it can have major effects on a business loan application. Lenders consider risk one of the key deciding factors of approving (or denying) a business loan, so the more your client can prove he or she pays back debts, the more likely a lender is to approve an application.

Though tax liens no longer affect a credit score, they still signal to a lender than your client is either unable or unwilling to pay back obligations. And because many lenders look at both personal and business financials, a personal tax lien can still affect a business loan application. That doesn’t mean your client can’t get a loan, but there many be fewer options or steps they need to take before they get approved.

If Possible, Take Care of the Lien

The first, and perhaps most obvious step, in the loan process with a lien record is to take care of the lien itself. This doesn’t necessarily mean that you have to pay it off before you can get a loan, mind you. Your best bet is to get an agreement about the lien in place for your client. Whether that means setting up an installment plan or an offer in compromise is up to you and your client, of course. Alternatively, you could try to get your client’s tax bill below $10,000, and request for the lien to be removed.

Any of these methods will signal to lenders that your client’s company is serious about its obligations. It also shows that management is dedicated to paying what it owes, which is paramount to almost every lender.

Lastly, there’s always the strategy of paying off the lien before the client seeks financing. This might be easier said than done, but it’s worth pursuing whenever possible. Lenders prefer to be repaid first if their borrower is in financial trouble. Tax liens demonstrate that the government gets priority on property before any lenders do, which increases the lender’s risk of never getting repaid. The faster they pay off the lien, the better—this will help assuage lenders and give them more certainty that they’ll be repaid.

Financing Options for Companies with Tax Liens

Lending to clients with tax liens is an inherently risky proposition. And, as we mentioned, few traditional banks have the stomach for it. But that doesn’t mean that your client is without options. Alternative lending is likely your client’s best option for getting a loan, as these lenders have a larger appetite for risk and tend to specialize in helping companies with subprime credit get funding.

Small business owners work with alternative lenders, most of whom are digital-first, to get access to a variety of loan products. Alternative lenders have approved 61%-64% of applicants during the last five years, whereas banks only approved 49% of the applicants in the same period. This means that your client is more likely to get the financing they need from an alternative lender than a traditional bank. These have similar terms and formats as more conventional loans, except often with higher interest rates in most cases. Your client may be eligible for smaller amounts of money than with traditional loans, but this often comes with daily or weekly payments. You’ll want to weigh their needs and options before signing on the digital dotted line.

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There are financing options out there, even if your client has to contend with a tax lien at the same time. You’ll have a smaller pool of lenders to choose from if you have a lien on your records, but you can still pursue funding through alternative lenders. With the right strategy and the right loan, your clients can fix their tax issues and still pose their companies for growth. It’s a challenging path to follow, but there are plenty of businesses out there doing the same thing, and lenders who are ready to help.

About the author

Meredith Wood

Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Specializing in financial advice for small business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.

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