Need to pay your business tax debt? The right loan could help – here’s what you need to consider.

Before you become personally liable for your business’s tax debt, you may want to explore a range of loan options to ease the financial pressure. Covering a tax debt, no matter what size your business is, can have a damaging impact on your cash flow and your operations. If your business has a large tax debt that you can’t pay up front, tax debt loans could be an options to explore.

What are tax debt loans?

Tax debt loans are short-term financial solutions specifically tailored to assist small- to medium-sized businesses settle outstanding tax debt. Terms are also usually more flexible, allowing business owners to set the pace at which they repay the loan.

These are especially handy if you know your business will be able to make up for the amount it owes in taxes within a few months’ time. And in addition to paying taxes, they can also be used to cover employee wages, day-to-day expenses and unpaid bills.

A selection of trusted business loan lenders

What should you consider when looking for a tax debt loan?

• Secured versus unsecured loans. While you can potentially get a business loan without providing any security, a secured loan can potentially lead to longer loan terms and lower interest rates.
• Interest rate. Interest rates will vary from one lender to the next, but will generally depend on your business’s revenue and age.
• Fees and other charges. Fees and charges associated with your tax debt loan may have a noticeable effect on how much you end up paying over the course of the loan, so make sure you review the fee structure before you apply.

How does tax debt affect my ability to get a business loan?

Tax debt, even small amounts, will show up as red flags to lenders. Many lenders may see your business as a risk — after all, if you can’t afford to pay your taxes, how can you afford to pay for your loan? Because of this, tax debt will affect the loan terms you’re offered, if you’re offered terms at all.

This limits your options to short-term business loans that can be used to quickly cover big expenses. Otherwise, long-term lenders like banks may impose higher interest rates, deny offers for unsecured loans and only offer short repayment periods, all of which can greatly impact your ability to repay a loan in the future.

Are tax debt loans tax deductible?

It depends. If a business is paying interest on a loan, where the loan was taken out for the purposes of maintaining that business, then you may be able to deduct those interest payments from your taxes. If the continuance of your business, and therefore your ability to earn an assessable income, is dependent on the business paying off its tax debt, then a loan used specifically to pay off tax debt might also be tax deductible.

As with all large financial decisions for your business, consult a tax accountant or other expert for more information and the steps you need to take to pay for your debts.

Are there benefits for a tax debt loan?

• Cover your debts. If you can’t arrange a payment plan, a tax debt loan will help your business to continue operating while you budget for loan payments.
• Get professional tax help. Some tax debt loan providers offer you a representative who can help you navigate IRS documents and learn about other important information.

What drawbacks should I be aware of?

• Fees and charges. Some lenders charge high fees for providing tax debt loans and related services, so make sure to check what costs you’ll have to pay when you apply.
• Compounding debt. Taking on another loan to cover outstanding debts can be risky – you could potentially start a cycle of debt that is difficult to break.

What other loan options can I consider?

Invoice financing

Invoice financing uses outstanding invoices to fund cash advances before the invoice is paid. If you’re waiting on payment from invoices that could help you pay your tax debt, this could be an option to consider. Depending on the lender, you could borrow up to 85% of the total value of your invoices to settle your tax debt.

Advantages of this option include:

• Fast approval
• More accessible than other loan types
• No real estate security necessary

Unsecured business loans

Unlike secured business loans, unsecured loans are granted without property or other valuable assets needed for collateral. Instead, the overall state of your business is evaluated and the loan may be granted if the lender feels you can honor your repayments. The terms differ depending on the lender, and repayment periods vary between one and seven years.

Lenders may consider:

• How long you’ve been in business
• Your personal and/or business credit history
• The business’s turnover and cash flow

Bottom line

When tax time is upon you and your business doesn’t quite have enough to cover it, a tax debt loan could be the difference between owing the IRS a huge amount at once and paying for that same amount over time. However, many short-term business loans that are used to cover taxes require daily payments with high interest rates, so compare your business loans to make sure you’re getting the best deal.

Frequently asked questions about tax debt loans

• Does my business qualify for a loan?

  Eligibility criteria varies between lenders. Usually, lenders require your business to have a steady monthly revenue and to have been operating for at least two years.

• Can I use proceeds from a tax debt loan for other purposes?

  Some lenders allow you to use proceeds from a tax debt loan for other purposes, but it will depend on your loan terms. Check with your lender to be sure.

• How long do loan terms last?

  This will depend on the type of loan you are approved for. Generally, loan terms are available for period from one to seven years, though some lenders may offer shorter or longer terms.