Can you get a business loan with a tax lien?

Why a lien worries funders

A tax lien is a legal claim against your assets for unpaid taxes, and it can rank ahead of a new funder's claim.

When a government agency files a lien, it asserts a right to business or personal property to satisfy a tax debt. A funder considering a new deal worries about two things: that the owner has a past-due obligation that gets priority, and that the claim could reach the same receivables or equipment.

Our short explainer on what a lien is covers the general idea. Rules differ by type of tax and by state, so confirm details with your accountant or the taxing authority.

Open, released and withdrawn liens are different

A released lien is far better than an open one. A payment plan can also help the picture.

• Open lien: the debt is unpaid. This is the hardest case.
• Lien with an installment agreement: you are paying on schedule. Some funders will consider the file.
• Released lien: the debt is paid and the claim lifted. Most funders treat this as resolved.
• Withdrawn lien: removed from the public record under certain conditions.

Ask the taxing authority for written proof of status. A letter in hand is stronger than a memory.

Payroll and sales tax liens are more serious

Unpaid payroll or sales tax involves money held for others, so funders usually scrutinize it more closely.

An income tax debt is one thing. Payroll taxes withheld from employees or sales tax collected from customers are different, because the business held that money in trust. Expect extra questions and fewer funders willing to proceed. If this is your situation, speak to a tax professional before applying for anything. See the difference between payroll and income taxes.

Steps to improve your position

Get a payment plan, make on-time payments, request a certificate of release when paid and keep your account clean.

A practical order of work:

1. Pull the lien details and amount owed.
2. Set up an installment agreement if you cannot pay in full.
3. Make several on-time payments.
4. When paid, obtain the release and keep a copy.
5. Maintain steady deposits and positive balances in the meantime.

Each of these makes the file easier to read. For the basics of what else funders review, see business loan requirements.

Using funding to clear the lien

Some owners borrow to pay off a lien. That can work, but only if the new payment is sustainable and the cost is worth it.

Illustrative example: you owe $18,000 on an installment plan costing $1,100 a month. A new product that costs $20,500 in total and requires $3,400 monthly payments may clear the lien but increase your burden. Compare the two paths. Our guide to using a business loan to pay taxes explores the tradeoffs.

The IRS and many states offer payment arrangements with low or no setup cost. Check their current terms first.

How ROI Funder reviews a lien

We look at the full file and match it to funders whose rules fit. We cannot promise approval with an open lien.

ROI Funder considers 500+ FICO, 6+ months in business and $20,000+ in monthly revenue. A lien adds a review step and may reduce options. Be upfront about it on the application. The credit pull is soft, and you are not obligated to accept an offer.

Questions to ask your tax professional

A short list of questions can clarify your lien situation before you speak to any funder.

Ask what exactly is owed and for which tax year, whether a payment plan is available, whether the lien can be released or withdrawn once certain conditions are met, and how long the process takes. Also ask whether a lien subordination, which lets another creditor rank ahead, is possible in your case.

Get answers in writing. If you work with a CPA, our note on how much a CPA costs may help you budget for the advice.

What not to do

Do not ignore notices, hide the lien from a funder or pay a firm that promises to erase your tax debt for a flat fee.

Ignoring a notice increases penalties and can lead to levies on bank accounts, which would also damage your statements. Hiding a lien is pointless, since it is a public record. And be wary of any service that guarantees a settlement. Use the taxing authority's own programs or a licensed professional.

Handled early and openly, a lien is a problem with a path. Left alone, it grows.

If you are weighing several paths, write down the monthly cost of each: staying on the payment plan, paying the lien with new financing, or waiting. Seeing the three numbers side by side usually makes the best choice obvious. A lien is stressful, but the math behind it is simple enough to check on a single page.