- Posted by: Administrator
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Of the many kinds of small business debt out there, few stoke as much fear as the dreaded tax lien. Tax liens, which arise due to delinquent or unpaid taxes, place a major flag on your financial history—even if they’re no longer reflected in your credit score. As an entrepreneur, few things are more crucial than your financial history when growing your business, especially if you’re in the market for financing.
If you have a tax lien, or are concerned you might receive such a lien in the future, you’re probably wondering how a tax lien impacts your ability to get a loan. After all, even entrepreneurs with good or fair credit can have a hard time getting a loan, depending on where they apply for one. Any major mark on your record could therefore make your chances at a loan with reasonable terms nigh impossible to get.
It’s fair to assume that a tax lien could prevent you from getting business financing altogether, but that’s not always the case. As with most lending matters, it depends on where you go for funding. If you have a tax lien on personal or business property, you may have fewer financing options, and a more complicated application process—but a tax lien is by no means a death knell for your entrepreneurial dreams.
What exactly is a tax lien and why would it affect my business financing?
A tax lien is essentially the government’s claim to your personal or business property as a result of unpaid taxes. If you fail to pay the taxes you owe, the government files a claim to the money you’d obtain from the sale of your possessions—be they your house, car, or company. A tax lien also permits the government to skip the line if you owe money to other creditors, which means that they get paid before anyone else does (or, if you have more debtors than you do assets, some creditors will never get paid at all).
In other words, tax liens are serious business. The government has the power to make sure it gets any taxes it’s owed, irrespective of your financial situation or debt situation. But it’s not a given that Uncle Sam will try to take away your property the moment you receive a tax lien. More often than not, the lien serves as a guarantee that you will pay your debt one way or the other. You’re free to pay the cash sum of the taxes you owe in lieu of having your property taken away, but the lien ensures that the government gets what its owed if you can’t pay up.
A personal tax lien can impact your business even if your company’s finances and tax payment history are spotless because creditors look for the least risky loan candidates when they determine whether or not to approve an application for a loan.
If you’ve ever taken out a loan for your business, you’re familiar with just how much financial information most lenders want from you before giving you cash. You can expect to submit your own tax returns, account statements, and other supporting documents that reflect your personal history with money. A personal tax lien shows lenders that you’ve had issues paying debts in the past—whether or not they’re attached to your business.
How can I get business financing with a tax lien?
The prospects of getting a loan when you have a tax lien sound daunting. And for the most part, they are. You can likely forget the idea of getting a conventional bank loan, as banks are too risk-averse to consider giving you money. Tax liens narrow the pool of people who are willing to take a gamble on getting repaid—especially if they won’t get their investment back until after the government gets paid.
But that doesn’t mean that you’re completely out of the running. With a tax lien in the mix, you’ll have a bit more work to do if you’re trying to get financing, but you can still put together a compelling application if you know which steps to take first.
1. Make sure your lien records are valid. If you end up blindsided by your tax lien, and have no history of unpaid taxes on your personal or business books, there’s a reasonable chance that the lien was submitted in error. If you’ve ever had a tax lien on your records, it’s vital that you ensure it’s been released. If you find that an old tax lien still appears in your history, despite being paid off, you will want to contact the tax authority as soon as possible to clear up the clerical error. Keep in mind that tax liens are supposed to be removed from your financial records 30 days after payment.
2. Pay off your tax lien. Sure, this might seem self-evident, but it’s important to pay off your lien as quickly as humanly possible. Liens are not irrevocable marks on your credit history; in fact, they’re only a factor for as long as your debt remains unpaid. The sooner you can wipe your lien off the books, the faster you can become eligible for low-interest business loans again.
Bear in mind that your lien issuer is often willing to help you find a way to pay off your debt. Most will offer repayment plans; some will even reach a compromise with debtors for a fraction of the lien’s total. If you and your business are cash positive, and you’re in a lien repayment program, you’re more likely to get approval for a loan than you would be without one.
3. Seek alternative lenders if necessary. If your lien is still valid and you’re unable to find a way to work with your debt, your options for getting business financing become more narrow. But that doesn’t mean you’re entirely out of contention for loans quite yet. You’re likely going to have to get financing from an alternative lender, such as a non-bank financier or online lending company. These lenders are usually willing to take on riskier creditors in exchange for higher interest rates or shorter repayment terms.
Alternative lenders can be helpful if you’re not likely to have your lien removed any time soon, yet still need cash to keep your company running smoothly. You may have to put more on the line in terms of collateral or higher interest rates, but at least you will still have an option to keep your company’s balance sheet in order.
The path to business financing gets more challenging with a tax lien on your company or personal property. But having a tax lien doesn’t disqualify you from obtaining financing entirely. If you’re smart about paying back your debt, reaching an agreement with your creditors, and finding smart financing that works for your business, you may still be able to get the funding you need.
SOURCE: ALL BUSINESS