Understanding the Effect of Business Tax Liens on Financing

tax lien

Of the many kinds of small business debt out there, few stoke as much fear as the dreaded tax lien. Tax liens, which arise due to neglected or unpaid taxes, place a major red flag on your financial history, even if they’re no longer reflected in your credit score.

As an entrepreneur, few things are more crucial than your financial history when growing your business, especially if you’re in the market for financing. If you have a tax lien or are concerned you might receive such a lien in the future, you’re probably wondering how a tax lien impacts your ability to get a loan. After all, even entrepreneurs with good or fair credit can have a hard time getting a loan, depending on where they apply for one. Any major mark on your record could therefore make your chances at a loan with reasonable terms near impossible to get.

What is a tax lien?

A tax lien is essentially the government’s claim to your personal or business property as a result of unpaid taxes. If you fail to pay the taxes you owe, the government files a claim for the money you’d obtain from the sale of your possessions, be they your house, car, or company. A tax lien also permits the government to skip the line if you owe money to other creditors, which means that they get paid before anyone else does (or, if you have more debtors than you do assets, some creditors will never get paid at all).

In other words, tax liens are serious business. The government has the power to make sure it gets any taxes it’s owed, irrespective of your financial situation or debt situation. More often than not, the lien serves as a guarantee that you will pay your debt one way or the other. You’re free to pay the cash sum of the taxes you owe instead of having your property taken away, but the lien ensures that the government gets what it’s owed if you can’t pay up.

How does a Tax Lien Impact my Financing Chances?

A personal tax lien can impact your business even if your company’s finances and tax payment history are spotless because creditors look for the least risky loan candidates when they determine whether or not to approve an application for a loan.

If you’ve ever taken out a loan for your business, you’re familiar with just how much financial information most lenders want from you before giving you cash. You can expect to submit your tax returns, account statements, and other supporting documents that reflect your personal history with money. A personal tax lien shows lenders that you’ve had issues paying debts in the past, whether or not they’re attached to your business.

How can I get business financing with a tax lien?

Make sure your tax lien records are valid

It is possible that a tax lien was submitted in error if you have no history of unpaid taxes on your personal or corporate accounts. If you ever had a tax lien on your records, you must make sure that it has been taken off. Even if you pay off an old tax lien, it should be removed from your financial accounts. If you discover that an old tax lien is still listed on your account despite having been paid, you should contact the KRA as soon as possible. It must be eliminated 30 days after payment.

Pay off your tax lien

Paying off your lien as soon as possible is vital. Liens are not permanent marks on your credit history; rather, as long as your debt stays unpaid, they only impact your credit rating. The earlier you can get rid of your lien, the sooner you can seek low-interest business loans again. Your lien issuer may help you find a way to pay off your debt. Many will provide repayment plans, and some will negotiate with debtors for a fraction of the lien amount. If you and your company are financially strong and you are on a lien repayment plan, you are more likely to get SBA financing than if you don’t have one.

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If your lien is still valid and you’re unable to find a way to work with your debt, your options for getting business financing to become more narrow. But that doesn’t mean you’re entirely out of contention for loans quite yet. You’re likely going to have to get financing from an alternative lender, such as a non-bank financier like Mwananchi Credit Ltd. We are usually willing to take on riskier creditors in exchange for higher interest rates or shorter repayment terms.

At Mwananchi Credit, we can be helpful if you’re not likely to have your lien removed any time soon, yet still, need cash to keep your company running smoothly. You may have to put more on the line in terms of collateral or higher interest rates, but at least you will still have an option to keep your company’s balance sheet in order.

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