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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   February 2008

An Option for Tax-Troubled Businesses

For cash-strapped borrowers facing tax liens, factoring can be a quick solution

For many of us, taxes are something we think about each April before scurrying to our accountants just in time to meet the filing deadline. We hope to get a little money back, and then we forget about it until the same time next year.

Not so for business-owners. Because they’re self-employed, business-owners must constantly put away money for tax liabilities. These can include federal, state, local, payroll and sales taxes, among others.

Further, many business-owners are faced with tax liens that hurt their ability to grow their business and finance commercial-expansion opportunities. A tax lien is a lien imposed on a business or property by a taxing authority to secure the payment of past-due tax revenues. It attaches to all rights, titles and interests of the business entity or person being assessed.

Not only does a tax lien on the business or commercial property prevent the transfer of title, but it also can have an adverse impact on the business’s credit rating and its ability to survive.

Traditional commercial lenders often think tax liens will prevent borrowers from getting clear title to a property, and they think they’re indicative of larger company problems.

For mortgage brokers, tax liens and judgments can mean problems getting business clients closed and funded. Even with multimillion-dollar commercial transactions, most underwriters will immediately get out their red “turn down” stamp as soon as they see outstanding tax liens, judgments or other past-due obligations.

Even though your clients’ company may be strong and built on a solid foundation, that doesn’t change the fact that traditional lenders have strict guidelines that they must follow.

Creative-financing solutions are often the only resource available to meet the business’s obligation. This is where you, the savvy broker, come in. You can help your business-owner clients find the right creative-financing solution based on the assets they have available. One of the most-common assets businesses have is their credit card receivables. As such, credit card factoring can be the answer.

Financing away tax debts

Many businesses’ tax problems happen because of insufficient cash flow, so paying off a tax debt using disposable income isn’t an option.

Credit card factoring is one of the most-aggressive alternatives for funding a business with tax liens. Factoring essentially provides “lending” against one primary business asset -- its credit card receivables. Also known as a business cash advance, factoring is a solution that rapidly injects capital into the business for just about any purpose.

Companies that provide credit card factoring purchase a fixed amount of the business’s future credit card sales at a discount and provide a lump-sum cash payment. By using this source of funding, business-owners benefit by converting future cash flow into immediate working capital. If needed, this can be used to satisfy tax obligations.

Because credit card factoring isn’t a loan, traditional loan underwriting guidelines don’t apply. There are typically no income or asset requirements. In addition, there are liberal credit qualifications and common-sense-underwriting standards. Tax liens and other judgments are only counted as debts to be paid and do not negatively impact the business applying for approval.

The additional benefits of using a business cash advance to resolve a tax debt can include the following:

  • Lower funding amounts available, often as low as $10,000
  • Fast approval and funding, often within a couple of weeks
  • No real estate security or property-ownership requirements
  • No minimum credit-score requirements
  • No points, application fees or closing costs
  • No impact on the ability to qualify for other funding

While traditional funding may be a lower-cost alternative, most business-owners with tax liens will find it unavailable.

Ultimately, when business-owners approach the tax agency with an offer to settle their debt -- and proof of available funds -- they are more likely to reach an agreement. The tax agency may even accept a lower settlement amount.

The facilitator extraordinaire

As an originator, you can assist tax-strapped clients. Because you have a basic understanding of what is required, you can help assemble the team of experts needed to plan and work on a solution. This positions you as a problem-solver and often yields new business opportunities.

Unless you are properly trained and certified, you should avoid giving direct financial-planning or tax advice. Refer your clients to the experts. In all matters dealing with taxes and the Internal Revenue Service, they should work with an accountant. Either work with the business-owners’ current accountant or recommend someone in your referral network.

Once your clients have decided that credit card factoring is the way they’d like to go, make sure you fill that need. You can do this by working with factoring companies that are professional, courteous and fast-acting.

•  •  •

While most tax liens and debts are seen as a red flag for any type of funding, a proactive originator can turn these challenges into opportunities. By facilitating the process, you may save the day for your business-owner clients.

By helping borrowers find ideal scenarios to resolve short-term funding needs, you’re also helping provide them with long-term loan options for the growth and development of their business. This can result in not only the closing of the current transaction, but also in many future referrals.

Further, by involving other industry professionals in the process, you’re forming new relationships that can lead to multiple referrals from experts in other fields -- experts with business clients that may face the same challenges and need a lending professional to provide funding assistance.

Disclaimer: This article is intended for educational and informational purposes only and should not be interpreted as tax, legal or financial advice. Advise your clients to consult a certified public accountant for their specific situations.


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