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Can tax liens affect business finance options?

Imagine this: a while back, your business was having some cash flow problems and you got behind on your taxes. You weren’t able to make an offer in compromise or cover the taxes in the timeframe requested by the IRS, so they put a tax lien on your business assets. Fast forward to today, when you are trying to raise capital to grow your operation. Will that tax lien make it impossible to secure financing?

The short answer is, like so many other things in the legal arena, “it depends.”

What is a tax lien?

Essentially, a tax lien is an “IOU” to a state or federal tax authority. It is the agency’s way of asserting that you owe them money, and at the same time asserting dominance over any other creditors’ claims to your business assets.

If you have a tax lien and you end up dissolving the business and selling off assets, the IRS will use their lien privileges to collect payment before any of your other creditors.

What does a lien mean for financing options?

Having a lien no longer affects your credit score, but it does signal to lenders that you might potentially be a bad risk for loans. It’s not necessarily a “death knell” when your business needs an infusion of capital, but it will make things more difficult. Unless you can resolve the tax lien, you may need to consider alternative lenders that are less risk-averse than traditional banks.

Of course, resolving the lien by paying off the debt or by having the IRS correct an erroneous lien will give you the most financing options. Tax liens, whether they are against you personally, against the business or against a business partner, will give lending institutions some pause. If you are really interested in getting the best financing possible, try your best to clear the lien or to pay off tax debts prior to liens being levied.

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