Should You Borrow to Pay a Business Tax Bill?

Start with the penalty clock

Compare what the late payment will cost you in penalties and interest against what financing would cost over the same period.

Unpaid taxes usually accrue penalties and interest. The details depend on the tax type, whether you filed on time, and how late you pay. The rates and rules change, so check IRS.gov or your accountant for current figures instead of relying on a number from memory.

Here is the useful question. If you cannot pay in full on the due date, what is the all-in monthly cost of owing the tax agency, and what is the all-in monthly cost of owing a funder? If financing is cheaper, borrowing to pay the bill is rational. If the agency's plan is cheaper, financing replaces cheap debt with expensive debt.

File on time even when you cannot pay in full. Failing to file is typically penalized more heavily than failing to pay, and it closes off some relief options.

Payment plans to ask about first

The IRS and many states offer installment agreements, and these often cost less than private financing for owners who can pay over time.

Before you apply for any loan, ask your accountant about:

• Installment agreements. Monthly payments over a set period, available to many businesses with balances under certain thresholds. Check current thresholds on IRS.gov.
• State payment plans. Many state revenue departments run their own programs.
• Penalty relief. First-time penalty relief and reasonable-cause relief exist in some situations.

A payment plan is often cheaper than a short-term funding product. The tradeoff is that the agency has strong collection tools, such as liens, if you miss payments. Financing from a funder moves your obligation to a different creditor with different consequences.

When financing a tax bill makes sense

Borrowing makes sense when the agency's penalties would exceed the financing cost, or when an unpaid bill threatens liens, levies or your ability to operate.

Cases where financing can help:

• A one-time bill, such as a quarterly estimated payment you underestimated, with revenue strong enough to repay quickly.
• A payroll tax problem. Payroll taxes withheld from employees' pay are treated seriously, and falling behind can create personal liability for owners. Resolve these fast, with professional help.
• A sales tax bill that must clear before a license renewal.
• A seasonal business facing a bill in a slow month, with revenue due soon.

Cases where it usually does not:

• You owe more than your cash flow can repay even with financing.
• The underlying problem is a business that loses money each month.
• A cheaper installment agreement is available and you can afford it.

Cost comparison with round numbers

In this illustrative example, an installment agreement can cost a few hundred dollars less in the first year than a short-term funding product, though the real gap depends on your rates.

The figures in the table are examples to show the structure, not quotes. Factor ranges vary by file. Always ask for total repayment in dollars. The 1.3 factor rate guide shows how to translate a factor into a monthly cost.

Which ROI Funder product comes closest

Working capital fits an urgent one-time bill, a term loan fits a larger balance you can repay over time, and a line of credit fits recurring estimated payments.

For a deadline-driven payment, working capital can be funded the same business day on approved, complete files. A term loan gives fixed payments over a longer time, usually at lower total cost, but takes one to five days. If you face predictable quarterly bills, a line of credit lets you draw, pay and redraw.

Funders do not usually pay a tax agency directly. You receive the funds in your business account and then make the payment. Keep the confirmation. Also be aware that outstanding tax liens can affect what a funder will offer, since a lien can claim your business assets ahead of other creditors.

Plan so next year's bill is not a surprise

Set aside a share of every deposit into a separate tax account so the next bill is already funded.

The cheapest way to pay a tax bill is to have the money ready. Open a separate savings account and move a set percentage of each deposit into it. Your accountant can suggest a percentage based on your entity type and profit.

Make estimated payments quarterly if you are required to. Review your profit mid-year so a strong second half does not produce a surprise. If you needed financing this year, treat it as a signal to fix the system, not just the bill.