How a federal tax lien affects small business borrowing
A federal tax lien (often called a Notice of Federal Tax Lien or NFTL) is filed by the IRS to publicly declare its legal claim on a taxpayer’s assets for unpaid federal taxes. For small businesses, the practical effects can be immediate and material: lenders treat liens as competing claims on collateral, which reduces the value of the business as security, tightens underwriting, and often leads to higher interest rates or outright denials.
This article explains exactly how liens change lending decisions, the differences among lender types, steps you can take to restore borrowing options, and realistic alternative financing paths while a lien is active. The guidance reflects IRS rules current as of 2025 and practical experience working with small businesses on tax and lending issues. For IRS background on the Notice of Federal Tax Lien, see the IRS guidance (IRS). For how credit reporting changed after 2017, see the Consumer Financial Protection Bureau (CFPB).
Why lenders care about federal tax liens
- Priority of claims: An NFTL signals the federal government has a statutory priority interest in the borrower’s assets. Lenders that rely on collateral see this as a material risk because the IRS can assert superior rights to proceeds if assets are liquidated.
- Collateral usability: If your loan requires a specific asset (buildings, equipment, receivables) as collateral, a lien can prevent the lender from taking a first lien position or force them to demand additional collateral.
- Creditworthiness and underwriting: Lenders use public records and tax transcripts during underwriting. An NFTL raises questions about cash flow, tax compliance, and management capacity.
- Regulatory and policy constraints: Some institutional lenders (including many banks and government-backed programs) have strict policies about outstanding federal tax liens and may decline applications regardless of other strengths.
How different lenders typically respond
- Traditional banks and credit unions: Generally the least flexible. Banks often require liens to be released or subordinated before providing secured lending. They may consider an unsecured facility only in strong cases, at higher rates.
- SBA and government-backed programs: The Small Business Administration and its lenders require tax compliance and may insist on resolution or structured agreements with the IRS. SBA guidance emphasizes current tax filings and resolved liabilities (SBA).
- Alternative and online lenders: More likely to lend with liens but charge higher rates and shorter terms. Underwriting focuses more on cash flow than perfect collateral.
- Invoice factoring, merchant cash advances, equipment financing: These specialty lenders may fund despite liens, depending on the collateral and lender appetite, but expect higher costs.
- Peer-to-peer and community lenders: Some smaller or peer lenders are flexible if you can demonstrate repayment capacity, but terms will vary widely.
What a lien does — and what it doesn’t — do to your credit profile
- Public record vs credit reports: Major credit reporting agencies removed tax liens and many public records from consumer credit reports starting in 2017. That means an NFTL may not appear on a standard consumer credit report, but it is still a public record and will show up in title searches, background checks, and direct inquiries to county recording offices (CFPB). Lenders often run those non-credit report searches.
- Long-term reputation effect: Even after a lien is released, lenders and vendors may view a prior lien as a sign of past tax problems. It can take time and documented financial stability to change that perception.
Common lending consequences for small businesses
- Mortgage and real estate financing: Tax liens can block mortgage closings or refinancing because title companies commonly require clear title or a release/subordination for the lien.
- Equipment loans and asset-based lines: If the lender cannot get first-priority lien on the financed asset, they will either decline or demand a higher rate, larger down payment, or personal guarantees.
- Lines of credit and working capital loans: Lenders will scrutinize tax transcripts to ensure taxes are current and may condition approvals on entering an installment agreement and proof that the IRS will not levy.
- M&A, sale, or investor transactions: Buyers and investors typically require liens be satisfied or subordinated before closing.
Steps to improve borrowing options when a lien exists
- Get full tax and lien information
- Request IRS account transcripts (through a tax professional or directly) to confirm the amount, assessment dates, and whether a lien is filed. Your tax pro can pull transcripts using IRS e-Services or you can use IRS tools (IRS).
- Consider short-term actions the IRS commonly accepts
- Pay in full: The simplest path. After payment, the IRS files a Certificate of Release (the lien is released). This is the fastest way to restore collateral value.
- Enter an installment agreement: The IRS often allows monthly payments; some agreements permit withdrawal of an NFTL for qualifying agreements. See IRS withdrawal rules and the Fresh Start program for details (IRS Fresh Start).
- Offer in Compromise or penalty abatements: Where appropriate, these resolve tax liability but take longer and require strict documentation.
- Request a lien withdrawal when eligible
- If the NFTL is causing economic hardship or you meet Fresh Start criteria, you can apply for withdrawal using IRS procedures (Form 12277 is used to request a withdrawal of a filed Notice of Federal Tax Lien). A successful withdrawal removes the public Notice, improving your ability to get loans because the lien will no longer appear on title searches even though the underlying tax debt may remain (IRS).
- Negotiate lien subordination or partial discharge
- Subordination lets a lender take priority over the government for specific collateral, which can enable real estate financing or refinancing. A discharge clears a specific property from the lien so that asset can be sold or financed. Both are IRS administrative actions and require documentation and review.
- Provide lenders with documentation proactively
- Share IRS tax transcripts, proof of payments, or an approved installment agreement. Lenders are more likely to consider an application when they see an enforceable plan with IRS cooperation.
- Improve business financial signals
- Strengthen cash flow forecasts, maintain bank statements, reduce other debts, and prepare audited or reviewed financial statements where possible. Strong business metrics can offset lien-related concerns, especially with alternative lenders.
Practical checklist for loan applications with an active or recently resolved lien
- Obtain current IRS transcripts and any lien documentation.
- Secure a written statement from the IRS if a withdrawal, subordination, or release is pending.
- Prepare 6–12 months of bank statements and aged receivables.
- Create a one-page executive summary explaining the lien’s origin and the steps taken to resolve it.
- Be ready to offer additional collateral or personal guarantees.
Alternative financing while addressing a lien
- Short-term bridging options: Invoice factoring or purchase-order financing can provide working capital without relying on real estate collateral.
- Equipment financing: Lenders may permit first priority on equipment purchased with the loan proceeds even if a general lien exists, depending on documentation.
- Microloans and community development lenders: These can be more flexible for smaller amounts.
- Bootstrapping and vendor terms: Extending payables and negotiating vendor credit can buy time while you resolve taxes.
Expect higher costs from these options. Keep comparisons in writing and calculate the effective annual cost before signing.
Real-world examples and lessons learned
In my practice I’ve seen business owners who delayed addressing payroll taxes find themselves shut out of refinancing opportunities when a lien appeared in a title search during a property sale. Resolving the lien or negotiating subordination allowed the sale or refinance to proceed. Another client obtained an equipment loan by providing a clear, bank-grade cash-flow projection and agreeing to a higher rate plus an escrowed payment to the IRS.
Key lesson: transparency and speed matter. Lenders react positively when borrowers present a documented remediation plan that includes IRS acknowledgment (transcripts, payment agreement, or withdrawal request).
Where to get authoritative help
- IRS information on Notices of Federal Tax Lien and lien withdrawal procedures: https://www.irs.gov/ (search “Notice of Federal Tax Lien”) (IRS).
- Small Business Administration guidance on tax matters and loan eligibility: https://www.sba.gov/ (SBA).
- Consumer Financial Protection Bureau overview of public record reporting changes and their effect on credit reports: https://www.consumerfinance.gov/ (CFPB).
For targeted, step-by-step help you may also wish to review FinHelp’s related glossary entries: How to Release an IRS Tax Lien: Steps and Requirements and Navigating a Notice of Federal Tax Lien: What to Expect. If you’re evaluating removal, withdrawal, or subordination options, see our article on Resolving Tax Liens: Removal, Withdrawal, and Subordination.
Final takeaways
A federal tax lien creates real, practical barriers to borrowing: it reduces available collateral, complicates title, and alters lender risk assessments. The fastest ways to restore credit access are to pay the tax, negotiate an IRS agreement that triggers a withdrawal, or obtain subordination or discharge on specific assets. While alternative lending can bridge short-term needs, it is typically more expensive. Work with a tax professional and be proactive with lenders—clear documentation and an IRS-approved plan are the most persuasive tools.
Professional disclaimer: This article is for educational purposes only and does not constitute tax, legal, or lending advice. Consult a qualified tax attorney, CPA, or lending professional about your specific situation.
