factoring and tax liens

Is your company burdened with tax liens? An IRS tax lien will complicate your chances for accessing working capital. You could get turned down by a bank as a potential default risk and you could also be prohibited from selling any assets to raise money to keep your company open. The good news is that thanks to tax factoring, you may still qualify for a fast source of working capital, regardless of your debts to the IRS.

At a select number of factoring companies, companies owing federal taxes can still gain access to needed funds, provided their customers are credit-worthy and that they meet certain criteria. A top factoring company can help you convert your stack of invoices into cash in your pocket. With tax lien financing, you can both speed up your cash flow and make payments on what you owe on back taxes.

It is not uncommon for companies with tax problems to seek out factoring arrangements. Most traditional lenders, such as banks, perform lien searches before the loan initiation process gets too far, and they usually reject applicants holding federal tax liens. 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 work with borrowers that are free of tax liens, judgments and other negative information in their credit report.

However, some top factoring companies, such as Interstate Capital, take a different approach to financing company tax lien practices. When applicants have reliable and creditworthy customers, lien funding companies like Interstate Capital can welcome new clients challenged by tax burdens.

Tax liens hurt both established and new businesses. In particular, entrepreneurs and start-up owners can struggle financially until they get their companies on firm ground. Among their common mistakes are failing to file 941 federal payroll tax forms or 940 federal unemployment tax forms, failing to pay the taxes associated with those two forms, and failing to file and pay taxes on corporate or personal tax returns. Yet companies with active federal tax liens or histories of federal tax liens can still factor their accounts receivable. Factoring companies are willing to take on clients with active federal tax liens if there’s a possibility to mitigate the inherent risks. Typically factoring rates will be increased correspondingly to cover those risks.

Unlike financial challenges such as bankruptcies or judgments, federal tax liens carry unique risks for financing company tax lien providers. Federal tax liens jeopardize lien funding companies’ ability to collect from their clients’ customers. As a legal matter, the existence of federal tax liens places factoring companies at odds with the federal government, whose claim against their clients’ assets is superior to ours.

In many circumstances, however, it is possible to work with the IRS and factor with existing federal tax liens. In some cases, doing so may require a stand-still agreement or subordination agreement with the IRS. In other cases, particularly when an installment agreement has been negotiated between our client and the IRS, a factoring company is still able to purchase invoices and take from the advances the amount necessary to keep the installment agreement current. The most favorable outcomes would be in cases when the amount of the federal tax lien is relatively small when compared against the balance of the client’s accounts receivable.

factoring and tax liensOften, 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 tax liens are 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.

The factoring specialists at Interstate Capital look at a number of variables during the application process without making judgments. For instance, Interstate Capital does not disqualify an applicant simply because the owner has filed for bankruptcy protection in the past. Past business bankruptcies may result from a myriad of causes, including unavoidable business problems, over-reliance on debt, poor sales, mismanagement, and a host of other causes. At Interstate Capital, we believe that if we are doing a good job of purchasing invoices, we will be paid by our clients’ customers. The causes of business failure – or tax liens – should not impact our ability to collect on a client’s invoices.

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.

To learn more about factoring, click here for a free factoring assessment for your business.

About Interstate Capital

The Interstate Capital Group of Companies operates businesses in the factoring, freight brokerage, freight matching, and payable discounting industries.