Don't Borrow From Uncle Sam

When a small business is running tight on cash, choosing which things to pay with limited funds can stump even the smartest business owners.  Without adequate cash flow financing lined up, too many owners make the decision to delay federal and state tax payments as a way to free up cash.  This could include payroll taxes, quarterly tax estimates and other liabilities. Many owners have the intention to pay them as soon as they can, but it often snowballs into a larger problem.

The IRS does not appreciate late payments, and has several courses of action to punish delinquent parties.  With any delayed payment, interest and penalties accrue.  Some may consider this a "cost of capital" but it can become much more costly if the IRS issues an Intent to File a Lien notice. This means that the IRS is watching your company closely, and will take the next steps if necessary. Eventually, they will file a lien. Having a tax lien in place means that the government has the right to the company property to fulfill the debt owed to them from back taxes, plus any interest and fees. After 45 days, or as soon as your primary lender finds out about the lien, the government is in first position on all of your collateral. 

In essence, you may run from these liabilities for a moment, but you can never actually avoid them.  If necessary, the IRS will make it so you can pay no other debt but theirs first. 

How do you avoid these issues? What do you do if you already have a lien?

Tax liens are an indicator of credit risk and lenders often steer clear of businesses with too much additional risk. For this reason, it can be difficult for a business to find funding after a lien is in place, or the rates will be much higher. Fortunately, there are many companies, such as 12five, that view tax liens as a problem to be solved.   

  • If there is a lien in place we can address the lien itself by obtaining specific certificates of subordination as well as putting an installment plan in place with our tax partners.
  • In addition, a commitment must be made to stay current on any new tax obligations. Often this requires additional financing to smooth out the cash flow and make payments on time. 

Overall, the goal is to approach a finance company before you borrow from Uncle Sam. A lender can get you the cash flow you need without the interest, penalties and additional restrictions the IRS may place on you. With a solid plan and enough capital, many companies can successfully eliminate old tax liabilities, while staying current on new obligations.  For any additional questions in this area, please reach out to one of our Prospect Developers.

Liz WhittenComment