Factoring Blog

Why a Federal Tax Lien (FTL) Affects Your Ability to get Factoring

It’s not unusual for companies that have tax problems to also need business financing to help cover operating expenses. This makes sense since most companies that have tax problems also have cash flow problems.

Many business owners understand how their tax problems may prevent them from getting a business loan or line of credit. They are often surprised when they find out that getting invoice factoring will be difficult too, unless they get an IRS subordination.  They often ask – Why is this the case? Isn’t the factoring company just buying the invoice? Why would the factoring company care about a federal tax lien (or other liens)?

Why factoring companies care about liens

Technically, an invoice factoring company is not buying your invoice per se. Rather, they purchase the financial rights to your invoice. The only way to secure their position to get paid for any factored invoice is by filing a lien securing their collateral. However, if the IRS has filed a federal tax lien against the client, their lien may have higher priority than the factors lien. This means they get to collect, even if the factor has financed the invoice. As you can see, the factor has a substantial risk if this happens.

Handling the lien

There are two possible way to handle this problem. This simplest way is to pay off the IRS or taxing authority so that they can release their lien. Once the lien is released, you are free to factor your invoices. The problem is that many companies don’t have the money to pay their liens in the first place, and need the funding grow the business. Furthermore, getting funding is the only way they will be able to pay the lien. You can see there is a catch 22 in this argument. This leads us to the second solution.

The second way to handle this problem is to get a payment plan with the IRS and get the IRS to subordinate their lien to the factoring company. In return, the factoring company promises to make payments to the IRS on your behalf. These payment are taken directly from the advance or the rebate. The IRS wins because they get a steady payment from the factor. And you win because you get the financing you need.

As a disclaimer – we are not attorneys and we do not provide legal or financial advise. This article is not to be considered legal advise. Please hire a competent professional if you need advise.

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