Already have an IRS business lien or worried the government will file one? Often the result of unpaid payroll taxes or other tax issues, liens can stall business growth and make it much harder to pay debts no matter how diligent or dedicated you are. We’ll break down what business tax liens are, why they happen, and how invoice factoring can help below.
What is a Business Tax Lien?
When the government determines that a business taxpayer owes and has concerns it won’t pay, one of the tools in its arsenal is to have a lien placed on the business and its assets.
If you’re a property owner with a mortgage, you probably already have a lien against your property. In these situations, your mortgage company will file a lien when they fund your purchase. The lien indicates the bank or lender is prioritized over other creditors where the property is concerned and grants it certain rights. For example, the bank gets the first claim on funds when you sell your home. The lien also allows the bank to act if you don’t make good on your payments, which can include seizing the property after certain processes are followed.
An IRS business lien works similarly. It’s the IRS’s way of saying the agency is prioritized over other creditors where your business is concerned and grants it certain legal rights. However, it’s not limited to just the business property. It covers all the company’s assets from the equipment through accounts receivables.
When Does the IRS File a Business Lien?
The IRS does not generally file a lien right away, even with delinquent taxes. The agency has a process it follows that involves trying to work with you and get you on a payment plan before moving forward with a lien. Your best opportunity to correct the problem is during this window before a lien is placed. However, if you don’t comply or can’t meet the agency’s demands, and the IRS notifies you that a lien is being filed, you still have options.
How Does a Tax Lien Affect Your Credit?
On one hand, a lien means you can’t readily sell business assets. Unless specific steps are taken, the government’s claim to an asset remains even after it’s sold. This means that the government can still seize the asset regardless of who possesses it, even though the other party is not responsible for the debt.
This alone excludes you from asset-based lending options. Your receivables are considered assets, and the government is first in line for them. They can’t be used as collateral because the IRS would get them first.
Additionally, these types of liens raise red flags that other liens, like the one on your home, don’t. They signify financial distress. So, you probably won’t qualify for traditional bank loans either. It’s too risky for the finance company as it will have no recourse if you default because, again, the IRS comes first.
It’s also worth noting that IRS liens may stay in place even if the business files bankruptcy, so small business owners often prioritize paying the agency when push comes to shove. If a lender is willing to extend credit despite this, the fees charged are likely to be much higher than normal to compensate for the additional risk.
How Factoring Can Solve Business Tax Problems
Tax professionals can help you strategize and negotiate with the IRS, so it’s a good idea to consult with a specialist if you’re struggling. However, one solution they routinely recommend is factoring.
Think of invoice factoring like a cash advance on your unpaid B2B invoices or a form of receivable financing. It eliminates the wait for payment and gives you a quick injection of working capital. With that in mind, factoring can help you during the window before a lien is filed and assist you after too.
For example, let’s say the IRS sends you a notice of federal tax lien—a final notice explaining that you have ten days to pay off your balance or get it below $25,000 or it intends to file a lien. You’d love to, but your customers aren’t going to pay you for at least 30 days, and there’s no way you’re getting a traditional bank loan within ten days. You simply go to a factoring company and request an advance, then pay the IRS immediately. You’ve now avoided the lien entirely and are free to move forward.
Or, let’s say the IRS has already filed a lien, and your business is struggling. You’ve got payments to make to the agency and overhead to cover. You’re working as hard as you can, but cash flow is sluggish. At this stage, a factoring company can’t just jump in because the IRS now has first place on your customer invoices. However, IRS may consider subordination. Suppose you can demonstrate that the lien is damaging your ability to repay and demonstrate how factoring will help. In that case, the IRS may agree to take second place on your receivables and allow the factoring company to come in first place. Sometimes, the factoring company can even make payments directly to the IRS, alleviating any concerns it may have about non-payment. With the cash advances you receive, you can pay the IRS and level up your business by adding in more staff, purchasing materials and equipment, or accepting more work, so you can get your tax issues taken care of even faster and have a healthier business in the long run.
It’s also worth noting that the approval process for factoring is fast and easy compared to business loans. Even if your credit history isn’t great because of IRS issues or payment history, you can still qualify because factoring companies are more concerned with your customer’s ability to pay their invoice than your credit score.
What is the Invoice Factoring Process?
Factoring is simple. You simply choose which B2B invoices you’d like advances on and submit them to the factoring company. The factoring company then provides immediate payment for a portion of the invoiced amount—usually 80 to 90 percent of the invoice’s value (even higher for some industries) —and then waits for your customer to pay. When the final payment comes in, the factoring company sends you the remaining amount, minus a nominal fee for the service.
What Kind of Industries Benefit Most from Using a Factoring Company?
Factoring works for all kinds of businesses in the B2B sector. Businesses that leverage it most tend to be those with lengthier invoicing terms, those with seasonal shifts or other issues that contribute to cash flow problems, and those with significant expenses before completing an order or work that need to be covered to keep generating revenue.
Trucking & Freight Services
Factoring is a favorite for the trucking industry because trucking companies typically must pay their drivers in advance of receiving payment for their invoices. Also, carriers have fuel and equipment-related expenses that must be covered before drivers can hit the road. It can take months after a load is complete before payment is made. Factoring companies that serve trucking and freight businesses can provide payment as soon as a load is complete, so the business can cover the cost of taking on the next load. At Charter Capital, we also provide perks like fuel cards for trucking companies, so they save even more money.
Freight brokers are in a similar situation. They’re waiting for shippers to pay, but they need to get carriers paid promptly, or they may stop accepting work. With factoring for freight brokers, the factoring company pays the invoice right away and can even send cash directly to the broker or carrier as part of a QuickPay program.
Staffing companies find talented people, vet them, and place them. When you add the time for invoicing and waiting on payment, months can pass before the company sees a return on their investment. When a staffing company chooses factoring, they get paid right away, so they can keep searching for talent and pay employees promptly. Many also appreciate that factoring relieves them of the collections process, so they’re free to focus on the business.
Oftentimes, manufacturing companies use factoring to cover the contract’s initial expenses, like purchasing supplies and equipment. However, many use it to speed cash flow during slow periods and cover operating costs like payroll.
Similar to staffing companies, factoring helps security firms find talent and cover payroll. Both may use their factoring cash to fund acquisitions and negotiate discounts with suppliers too.
Oil & Gas Services
Companies in oil and gas use factoring for a wide variety of things. Because they often support large corporations that can take ages to pay, the streamlined receivables process allows them to cover their daily expenses, grow, and position themselves more competitively.
Consulting & Service Firms
Like many of the others outlined here, consulting and service firms choose factoring to cope with delays between the output of their expenses and final payment from a customer. They often put the advances to work, covering recurring expenses, growth, marketing, and getting debts paid off.
Solve Your IRS Issues with Factoring
As a leading factoring company with experience helping businesses cope with their IRS troubles, Charter Capital can walk you through the process and your factoring options. To kick off the process, request a free quote.
Disclaimer: The author of this article, Charter Capital, and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
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