Factoring With a Tax Lien: What an IRS Lien Means for Your Invoices
A tax lien does not rule your business out: the lending partner reviews it case by case. A federal lien attaches to your receivables, so learn how lien priority works and what an installment agreement and a certificate of subordination change.
- ✓Priority first. A filed Notice of Federal Tax Lien can outrank a later factoring UCC-1.
- ✓Payment plan. An IRS installment agreement in good standing shows the debt is under control.
- ✓Subordination. An IRS certificate of subordination can move the lien behind the factor.
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Message a SpecialistExecutive Summary: Factoring With a Tax Lien
What it is: Factoring with a tax lien is selling your invoices while a federal or state tax lien is on record, which means addressing the lien's claim on those receivables before a factor buys them.
The numbers: Once the lien is addressed, you receive 70%–90% of each approved invoice after same-day approval and a 2–5 day closing. The factoring fee runs 1%–3%, and there is no minimum credit score.
Key constraints: A tax lien gets a case-by-case review and does not rule you out on its own; an IRS installment agreement in good standing helps. Payroll taxes reported on Form 941 must be current, and factors review your IRS transcripts through Form 8821.
The Fast Facts on Factoring With a Tax Lien
Can I factor invoices with an IRS tax lien?
Yes, you can, in many cases, once you have an IRS installment agreement in good standing and the factor's position is protected, often through a certificate of subordination. An unpaid lien with no payment plan gives the IRS a claim on the same receivables you want to sell.
What is a Notice of Federal Tax Lien?
A Notice of Federal Tax Lien is defined as the IRS filing that makes a tax lien public and sets its priority against other creditors. It attaches to all of your property, including receivables, and a factor's UCC-1 filed after it generally ranks behind it.
What is a certificate of subordination?
A certificate of subordination is defined as an IRS document that moves a federal tax lien behind another creditor's interest on specified property, such as your receivables. You apply on IRS Form 14134, and the IRS decides whether the subordination helps it collect the tax.
How a tax lien attaches to your receivables
Federal tax lien
A federal tax lien is the government's claim on all of your property, including receivables, once tax debt goes unpaid after notice and demand. It exists before the IRS files any notice.
Notice of Federal Tax Lien
The NFTL makes the lien public and sets its priority. A factor that buys receivables after the filing generally ranks behind it.
State tax lien
A state revenue agency files its own lien for unpaid state taxes, such as sales or withholding tax. Review what else affects approval on the eligibility page.
Steps that make factoring possible
| Step | What it does | Who acts |
|---|---|---|
| IRS installment agreement | Puts the tax debt on a payment plan | You, with the IRS |
| Form 8821 | Lets the factor see your IRS tax transcripts | You sign; the factor reviews |
| Form 941 filed and paid | Shows quarterly payroll taxes are current | You or your payroll provider |
| Certificate of subordination | Moves the federal lien behind the factor on receivables | The IRS, on your application |
| Lien withdrawal or release | Removes the public notice, or ends the lien after payment | The IRS |
Withdrawal, release and subordination
Tax lien withdrawal
A withdrawal removes the public Notice of Federal Tax Lien, though you may still owe the tax. It can follow a direct debit installment agreement.
Tax lien release
A release ends the lien once you pay the tax debt or it becomes unenforceable. The IRS issues it within 30 days of full payment.
Subordination agreement
A bank or other private creditor can sign a subordination agreement so the factor ranks first on receivables. See how creditors split collateral under asset-based lending.
Factoring with a tax lien vs. bank loan vs. Merchant Cash Advance (MCA)
| Feature | Factoring With a Tax Lien | Bank Loan | Merchant Cash Advance (MCA) |
|---|---|---|---|
| Approval with an open tax lien | Yes: reviewed case by case | Rare | Possible, at high cost |
| Typical Approval Speed | Same day once the lien plan is in place | Weeks | One to three days |
| Minimum Credit Score Requirement | No minimum credit score | Strong credit | Low |
| Maximum Advance Rate | 70%–90% of each invoice | Not applicable | Based on future sales |
| Debt Added to Balance Sheet? | No | Yes | Often treated as a purchase of future sales |
Funding scenarios for factoring with a tax lien
Installment agreement, then factoring
- Funding Amount
- $88,000
- Industry
- Commercial janitorial services
- Customer Type
- Contractor billing office property managers
- Funding Type
- Invoice factoring
- Invoice Terms
- Net-30
- Advance Rate
- 80%
An NFTL for unpaid payroll taxes blocked a bank renewal, and the owner was two Form 941 quarters behind.
The SolutionThe owner filed the missing returns, entered an IRS installment agreement and applied for a certificate of subordination on receivables.
ResultAfter the IRS issued the certificate, the owner received $88,000 on $110,000 of invoices.
State tax lien paid at closing
- Funding Amount
- $42,500
- Industry
- Building materials supply
- Customer Type
- Supplier billing general contractors
- Funding Type
- Invoice factoring
- Invoice Terms
- Net-45
- Advance Rate
- 85%
A $12,000 state sales tax lien showed in the lien search before closing.
The SolutionThe owner used part of the first advance to pay the state, which then issued a lien release.
ResultThe owner received $42,500 on $50,000 of invoices, and $12,000 of it cleared the lien.
Government subcontract with a tax lien
- Funding Amount
- $126,000
- Industry
- Facilities maintenance
- Customer Type
- Subcontractor on a federal base contract
- Funding Type
- Government contract financing
- Invoice Terms
- Net-30
- Advance Rate
- 90%
The owner had a federal tax lien under an installment agreement and a new task order to staff.
The SolutionThrough government contract financing, the lending partner handled the Assignment of Claims, and the lien did not rule the business out.
ResultThe owner received $126,000 on $140,000 of invoices to cover the first month of payroll.
Who the factoring with a tax lien guide is for
Owners behind on payroll taxes
You have Form 941 balances and need cash to stay current while an installment agreement runs.
Contractors with a filed NFTL
A public lien blocked a bank renewal and you need another source of working capital.
Government subcontractors
You hold a federal task order and a lien under an installment agreement.
Where IFXI arranges invoice factoring
Texas, Florida, New York, Illinois, Georgia, Ohio, and Pennsylvania.
Frequently asked questions about factoring with a tax lien
Will a tax lien stop me from getting approved?
The short answer is no: a tax lien gets a case-by-case review and does not rule you out on its own, and an IRS installment agreement in good standing helps your file. The credit review looks at your payment history on the plan, your Form 941 filings and whether the IRS will subordinate. There is no minimum credit score.
Do I need to pay off the lien before I factor?
The short answer is no, if you have an IRS installment agreement in good standing and the factor’s interest in your receivables is protected. Some owners use part of the first advance to pay a smaller state lien in full. Read more on funding with poor credit.
Why does a factor ask for Form 8821?
The short answer is that Form 8821 lets the factor see your IRS account transcripts, including balances owed and any filed liens. Those transcripts show whether payroll taxes on Form 941 are current. The form grants read access only and lets no one act for you with the IRS.
Is a tax lien withdrawal the same as a release?
The short answer is no: a withdrawal removes the public notice, and a release ends the lien itself. After a withdrawal you may still owe the tax, and the lien still exists until you pay. The IRS issues a release within 30 days of full payment.
Sources
- Notice of Federal Tax Lien (law.cornell.edu)
General information about factoring with a tax lien. Rates, advance amounts and approval come from IFXI’s lending partner after its review and can change.
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