Prospects are often surprised when a factoring company asks for copies of their latest IRS 941 or other tax documents. They ask, “Why do factoring companies ask for these documents? What do these documents have to do with invoice factoring?”
The reason is simple: the factor wants to be sure that there are no tax liens in place that could prevent it from factoring your invoices. By showing them your latest IRS Form 941, you can demonstrate that your company is up to date on its payroll taxes. Other tax returns can be used to demonstrate that your company is up to date on its other taxes.
This information can be very important for factoring companies, since non-payment of taxes can result in the IRS filing a tax lien on your corporate assets, giving the IRS a claim against the invoices that you want to factor. In other words, the IRS could claim the proceeds of a factored invoice and would need to be paid before the factoring company is paid. For this reason, factoring companies ask for tax documents.
And if you have tax problems?
Is factoring not an option for a company with tax problems? Not at all. When used correctly, factoring can finance certain companies with tax problems. Actually, accounts receivable factoring can be used in “distressed” situations, but the process requires some extra work and know-how. Your company needs to work with the IRS to get a lien subordination in place allowing the factoring company to have first position on the factored invoices.
Negotiating a lien subordination and inter-creditor agreements are complex matters. Retain an attorney if you choose this route, as it ultimately requires cooperation between your company, the factoring company, and the IRS. Being able to work in these types of situations is one of the things that makes factoring a flexible business financing option.
If your company has tax problems and you are looking to factor your invoices, it’s usually best to disclose that information at the start of the application process. Full disclosure allows you and the factoring company to plan things accordingly.
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Disclaimer: This article does not intend to provide legal or financial advice. Please consult a qualified adviser if you need advice.