Can You Get a Small-Business Loan With a Tax Lien?

Take steps to resolve the lien to improve your odds of getting a business loan.

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Getting a small-business loan with a tax lien on your record is close to impossible. Yes, some online lenders may extend funding despite a tax lien if your sales and credit are stellar, but those are the exceptions and not the rule.

Your best course of action: Take steps to address the tax lien before applying for a business loan. You’ll have more loan options and be able to secure better rates and terms.

This article will help you learn more about tax liens, including what steps to take to get a business loan after a tax lien.

What is a tax lien?

Fail to pay personal or business taxes, including payroll, income or property taxes, and the government will place a tax lien on your property and financial assets, legally giving it first dibs to your wages, property and other assets if it needs to collect on your tax debt.

While liens don’t show up on your credit report, they're part of the public record and accessible to potential lenders. Having a tax lien on your business or personal property is a major red flag to lenders and will automatically disqualify you from most small-business loans.

Tax liens are released within 30 days once paid in full, including interest and fees. A release doesn’t automatically remove the lien from public record; that requires a withdrawal. To qualify for a withdrawal, you also need to:

  • Be in compliance for all tax returns, individual, business and informational, for the past three years.

  • Be current on estimated tax payments and deposits.

There are other options to resolve and withdraw the lien, if you qualify, including payment arrangements.

Ignoring a tax lien can lead to a tax levy, where the government seizes property and financial assets to pay off your tax debt.

How to get a business loan after a tax lien

Your business loan options will be extremely limited if you have an active tax lien, but there are steps you can take to improve your odds of funding.

1. Verify the lien is accurate

Even the IRS makes mistakes, so it’s important to confirm the amount of the tax debt owed is correct. You can also contact the IRS Centralized Lien Operation to verify a lien or search for liens online via the appropriate agency.

Liens on vehicles are held by your state’s department of motor vehicles, while property liens can be found via your county clerk, recorder or assessor.

Do you believe there's an error? Your lien notice will have instructions for how to challenge the filing. Act fast, though. Disputes often need to be filed within a specified time frame. The Taxpayer Advocate Service, an independent organization within the IRS, can also offer assistance.

2. Establish a repayment plan

Ideally, you can pay your tax debt in full to have the lien released and withdrawn. If that’s not possible, contact the IRS to set up a direct debit installment agreement. Once established, the IRS may withdraw your lien, assuming you meet the following requirements:

  • You’ve made three consecutive direct debit payments.

  • Your debt will be paid in full within 60 months or before the collection statute expires, per your installment agreement.

  • Your tax debt is less than $25,000 when you request the withdrawal.

  • You haven't defaulted on an installment agreement, current or in the past.

You can also request an offer in compromise, which settles your outstanding tax debt for less than the full amount. It can be hard to qualify for, though, and it isn't an option if you’ve filed for bankruptcy or are under audit.

3. Explore online lenders

Online business lenders tend to have more lenient underwriting criteria and some will extend a loan even if you have a tax lien, assuming you have an otherwise strong loan application. It helps to show you’re taking steps to resolve the lien.

If you're approved for an online small-business loan despite your tax lien, expect to pay higher rates and have less favorable terms than you would without the lien. And plan to refinance for better rates once the lien is resolved and withdrawn.

A word of caution: Be wary of alternative lenders that advertise “bridge loans” to pay your tax debt so you can then qualify for an SBA loan or other small-business loan. It will take time for the lien to be released and you still need to meet other qualifications for the lien to be withdrawn. Plus, there's no guarantee you’ll be approved for another loan right away.

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