Factoring and Tax Liens

It is not uncommon for companies with tax problems to seek out factoring arrangements. Most traditional lenders perform lien searches before the loan initiation process gets too far, and they tend to view the existence of federal tax liens very negatively— as well they should. A tax lien or a history of tax liens speaks to the financial condition of a business and its ability to pay its creditors. Traditional lenders want to see borrowers that are free of tax liens, judgements and other derogatory information in their credit report.

But what about factoring? Why can companies with active federal tax liens or histories of federal tax liens sometimes factor their accounts receivable? The answer is fairly simple. Factoring companies generally charge a little more than traditional lenders, so they are willing to take on clients with active federal tax liens if there’s a possibility to mitigate the inherent risks.

Often, factoring companies are willing to establish contact with the IRS to obtain status on any collection or enforcement actions that might jeopardize the factoring company’s ability to collect on accounts they purchase. A major consideration is the amount of the federal tax lien relative to the factoring volume. If the size of the lien is manageable and the client has negotiated an installment agreement with the IRS, the factoring company will likely set aside a reserve to ensure those payments are made to the IRS. Sometimes, the factoring company will charge a monitoring fee when there are tax liens present to compensate them for the added expense of protecting their rights in their collateral. Finally, some factoring companies will seek to obtain a letter of understanding from the IRS, allowing, for example, the company to factor the accounts receivable so long as the client remains current on its taxes and on an installment agreement on back taxes, if any.

As a general rule, Interstate Capital advises applicants with federal tax liens to consult with one of our underwriting professionals so that we can examine each case individually. There are various strategies that may be viable on a case-by-case basis.

Author: Tony Furman
Copyright 2009
Interstate Capital Corp.

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