It’s not unusual for companies with tax problems to need business financing to be able to operate, since most of these companies also have cash flow problems. While these company owners understand why they wont be able to get a business loan or line of credit when the company has tax liens, they are always surprised when they find out that getting invoice factoring will be difficult to (unless they get an IRS subordination). 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)?

Technically, what the factoring company is buying are the financial rights to the invoice. It’s not a tangible good per se – but rather a right. And here is where it can get tricky, a lien can encroach on those rights. Let me give you an example:

Let’s say that hypothetical company XYZ Inc. has a year old federal tax lien that encroaches all assets. It then enters into a financing agreement and starts factoring. At this point, the factoring company has advanced 80% of for the invoices and is waiting for payment from the client’s customer. The IRS could (and many times will) direct the customer to pay the IRS first instead of the factoring company. Things can get trickier, but I wont go into all the complicated details. But you can see would be a losing proposition for the factoring company. They have advanced 80% to the client and won’t be able to collect from the customer. As you can see – it’s not as simple as “selling your invoices to the factoring company and forgetting about it!”.

However, you can factor your invoices if you, the IRS and the factoring company enter into an inter-creditor agreement where the IRS subordinates their position to the factoring company. In this case, if the factoring company does their paperwork well, they have first position on the invoice.

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.