Summary: Running a company that is behind in taxes is very difficult. In most cases, the company has cash flow problems, is behind paying its suppliers, and is at risk of failing. Some companies with tax problems can be turned around with the right type of financing. However, getting funding will be very difficult.
This article describes one way to get financing if your company has tax problems. It also covers some of the challenges you can expect in the financing process. We cover the following:
- Can financing actually help you?
- Why is getting financing difficult if you have tax problems?
- Improve cash flow with invoice factoring
- Challenges of using financing
- Get expert help early on
1. Can financing actually help you?
Turning around a company with tax problems is a complex process with no guarantee of success. One mistake business owners often make is trying to get financing before completely understanding their situation. This error can make your problems even worse.
The best approach is to evaluate your company and determine how it got into trouble in the first place. This process is not easy, but it is essential. Once you understand your situation, you must develop a plan to turn around the company. Only then will you be in a position to determine if getting financing will help turn the business around.
Having a well-thought-out turnaround plan is essential if you want to get financing and need to negotiate with taxing authorities. Your plan needs to demonstrate to them that your company and the management team can turn the business around. Consider hiring qualified experts to help you develop the right plan. This includes having a CPA and tax attorney with experience in these matters.
2. Why is getting financing difficult if you have tax problems?
One point that many companies overlook is trying to understand their lender’s perspective before approaching them. You have a better chance of success if you can address the main issues in your first meeting. It demonstrates that you are prepared and have a well-thought-out plan.
a) They could lose money
A lender’s main objection to working with a company with tax problems is the risk of losing money. Most underwriters ask, “What is the chance that the client will pay them back if they have not been able to pay authorities?” This concern is legitimate and should be addressed early on.
One way to address this issue is by sharing the details of how the company got into trouble. You can then show them your turnaround plan while emphasizing how the company will be able to pay its taxes and loan back. This approach shows them you understand how the company got in trouble and how to fix the problem.
b) Tax liens (IRS and other authorities)
Companies with tax problems often have liens from the IRS or other authorities. A lien encumbers your assets and allows taxing authorities to foreclose them. This scenario is a serious risk for financing companies for several reasons. It often explains why they shy away from working with troubled companies.
Some tax authorities may be willing to subordinate their lien in some circumstances. We discuss this matter in a later section.
3. Improve cash flow with invoice factoring
If your company got into trouble because of cash flow issues, you may be able to benefit from using invoice factoring. This solution can be used by companies with tax issues, provided they qualify for the service and meet some provisions.
Factoring helps companies with working capital issues caused by offering net-30 terms to their clients. These cash flow problems can spiral out of control if not handled correctly. They can cause company owners to delay payroll or miss tax obligations.
Invoice factoring provides an advance on your slow-paying invoices from commercial clients. The initial advance covers 85% to 90% of the invoice, depending on your industry and company details. The remaining 10% to 15%, less the financing fee, is advanced once your client pays the invoice on their usual schedule.
One of the main advantages of this solution is that it’s easier to obtain than conventional financing. It can even be used to finance companies with tax problems, provided the company can meet some requirements.
4. Challenges of using financing
Federal, state, and local authorities can file a lien against your company’s assets when taxes aren’t paid. This lien encumbers your assets. Liens complicate matters and affect your chances of getting funded. Factoring companies usually ask for a subordination and a payment plan from taxing authorities as a condition of providing financing.
a) Getting a subordination
A subordination enables the factor to obtain a first collateral position against accounts receivable. In our experience, taxing authorities are open to subordinating their position if you can show them that it will:
- Help your taxes get paid
- Stabilize your business
- Improve your chances of success
- Benefit the community (e.g., by keeping employment)
The negotiation process is not easy, and success is not guaranteed. You must present a viable turnaround plan and show you can execute it.
b) Establish a payment plan
Most taxing authorities will consider subordinating their lien only if you agree to a reasonable payment plan. The plan is a negotiated solution that allows you to pay your back taxes while you fix the company.
The subordination will be contingent on making timely payments on the repayment plan. Consequently, the factoring company will manage the payments on your behalf. This arrangement does not mean that the factoring company absorbs the liability. Rather, the factoring company agrees to submit payments to the tax authority by deducting them from your advances.
5. Get expert help early on
The biggest mistake we’ve seen business owners make is ignoring their problems, hoping that the situation will improve eventually. Unfortunately, things usually get worse and often spiral out of control.
Consider getting advice from qualified experts early on. At a minimum, you should work with a CPA familiar with business tax problems. If your problems are serious, consider working with a tax attorney. Their help will be essential as you plan to restructure your company.
Get more information
Are you looking for factoring financing? We are a leading factoring company and can provide high advances at low rates. For more information, get an online quote or call us toll-free at (877) 300 3258.
Note: This article is not intended to be legal, financial, or tax advice. Please consult a professional for help.