‍

Business Funding With Tax Liens: What Lenders Need to Know

A tax lien or serious tax arrears can complicate business financing, but the words “tax debt” do not tell a lender enough to make a decision.

The financing provider needs to know what type of tax is owed, whether a lien or other collection action has actually been registered, the current balance, whether payments are being made, and whether the tax authority has priority over assets the lender expected to use as collateral.

Those questions can materially change the financing structure.

Quick Answer: Business funding may still be possible with a tax lien or tax arrears, but lenders will usually investigate the balance, type of tax, collection status, payment arrangement, cash flow and collateral priority. Active payroll or sales-tax arrears can create greater concern than an older resolved income-tax balance because government claims can interfere with lender security.

Does Owing Taxes Automatically Mean You Have a Tax Lien?

No.

Tax debt, a tax lien and an active seizure or levy are different stages.

In the United States, the IRS says a federal tax lien is the government's legal claim against property after the IRS assesses the liability, sends a demand for payment and the taxpayer neglects or refuses to pay. The lien can cover real estate, personal property, financial assets and business rights such as accounts receivable. The IRS can also file a public Notice of Federal Tax Lien to notify other creditors of its claim.

A levy is different. The IRS explains that a lien secures the government's interest, while a levy actually seizes property to satisfy the debt.

Canada has its own process. The CRA says it can secure unpaid tax debt by placing a lien or charge against personal or business property after legally certifying the debt through a provincial judgment or Federal Court certificate.

That distinction matters to lenders.

A business with a manageable tax balance being paid according to an arrangement can present a different credit file from one facing an active lien, garnishment or asset-seizure process.

Canadian companies preparing a working-capital request can review Mehmi's Working Capital Loan Canada guide, which specifically treats tax status as part of a lender-ready financing package.

Can You Get a Business Loan With a Tax Lien?

Potentially.

There is no universal rule requiring every commercial lender to decline every business with a tax lien.

But the tax issue has to fit inside the credit structure.

A lender may consider:

• Total tax balance
• Type of tax owed
• Whether a lien has been filed or registered
• Whether collection enforcement has begun
• Whether the business has an active payment arrangement
• Whether payments under that arrangement are current
• Whether new tax obligations are also being paid on time
• Existing lender liens
• Assets available as collateral
• Business cash flow after tax payments
• Reason the arrears developed
• Whether loan proceeds will pay some or all of the tax debt

Mehmi's Business Financing Qualification in Canada recommends resolving CRA arrears or documenting an active arrangement because undisclosed tax debt can materially weaken a financing application.

The important question is not simply:

“Will someone lend despite the lien?”

It is:

“Can the tax claim and the new lender's repayment and collateral rights coexist in a structure that makes credit sense?”

Why Are Tax Liens a Problem for Lenders?

A secured lender wants to know what happens if the borrower defaults and the lender has to rely on collateral.

A prior tax claim can interfere with that recovery.

In the United States, the IRS states that a federal tax lien attaches to business property and rights to business property, including accounts receivable.

That can affect a lender expecting to take security in receivables, equipment or other business assets.

The IRS does provide procedures that can sometimes reduce the lien's impact. A subordination does not remove the federal tax lien, but can allow another creditor to move ahead of the IRS for specified collateral, potentially making refinancing possible.

A discharge can remove specific property from the lien in qualifying circumstances.

These are IRS processes with eligibility and documentation requirements—not automatic lender workarounds.

The financing provider may make approval conditional on obtaining the appropriate IRS documentation before funding.

Why Can Canadian Tax Arrears Be Especially Important?

Because some Canadian tax obligations can have powerful statutory priority.

The CRA distinguishes ordinary tax debt from deemed trust amounts.

Payroll source deductions withheld from employees and GST/HST collected from customers can become deemed trust amounts. The CRA says unpaid deemed trust debt can become secured over business assets and can have priority over proceeds from asset sales, even where other creditors hold security. CRA also says it does not need to register deemed trust debt in a public personal-property or land registry for that priority to arise.

That can be a significant issue for a Canadian equipment, A/R or asset-based lender.

A PPSA search showing no CRA registration does not necessarily prove there is no tax-priority problem.

This is why Canadian lenders often distinguish between:

• Corporate income-tax arrears
• GST/HST arrears
• Payroll source-deduction arrears
• Other CRA balances

Businesses should disclose exactly what is owed.

Mehmi's Business Loans With Bad Credit in Canada similarly identifies active CRA enforcement and undisclosed tax arrears as material lender concerns rather than treating tax debt like an ordinary trade payable.

Does a CRA or IRS Payment Plan Solve the Financing Problem?

It can improve the file, but it does not automatically remove every lender concern.

The IRS currently offers payment-plan options for qualifying business taxpayers, subject to filing, balance and other requirements. Certain higher or more complex balances can require additional financial information and a federal-tax-lien determination.

The CRA also allows businesses to arrange payments over time. CRA says the business must continue making the agreed payments, file future returns on time and remain current with ongoing obligations; if the arrangement is not maintained, collection action can resume.

For an underwriter, a payment arrangement can answer several useful questions:

The amount is acknowledged.

There is a defined repayment schedule.

The business is cooperating with the tax authority.

Payments can be verified.

But the lender still needs to calculate the payment as part of total debt service.

A company paying CAD $8,000 per month to CRA does not have that CAD $8,000 available for the new business loan.

An existing lien or deemed trust can also remain relevant despite a payment plan.

What Will a Lender Want to See?

Prepare the tax documents before submitting the financing request.

Depending on the jurisdiction and transaction, lenders may request:

• Current IRS or CRA account statements
• Notices showing assessed balances
• Copies of filed liens or registrations
• Current payment-arrangement documentation
• Proof of recent tax payments
• Confirmation that all required returns have been filed
• Official payoff amount
• Breakdown by tax type
• Existing debt schedule
• Recent business bank statements
• Current financial statements
• A/R and A/P aging
• Security-search results where applicable

Do not report “about $50,000 in tax debt” if the actual balance including interest and penalties is $83,000.

Obtain current numbers.

Mehmi's Business Loan Approval Time in Canada guide notes that outstanding CRA obligations can delay approval and that lenders may require evidence of a current payment arrangement.

Can Loan Proceeds Be Used to Pay the Tax Lien?

Potentially.

A lender may prefer this structure because paying the tax authority can improve its collateral position and remove a competing monthly payment.

For example, instead of lending $100,000 of unrestricted working capital while an $80,000 tax lien remains outstanding, a lender could hypothetically require that a portion of the proceeds be paid directly toward the tax balance at closing.

That means the borrower receives less net operating cash.

The use of funds needs to be modeled accurately.

Do not call a $150,000 loan “$150,000 of working capital” if $80,000 is going directly to the IRS or CRA.

The business is really receiving $70,000 of gross new liquidity before fees.

If the tax problem was caused by a temporary working-capital gap, Mehmi's Working Capital for Cash Flow guide can help separate a one-time timing issue from a business that repeatedly uses tax remittances to fund operations.

Illustrative Example: Paying an IRS Tax Lien at Closing

Assume an established U.S. business has a filed USD $80,000 federal tax lien and needs additional operating capital.

This is an illustration only. It is not a Mehmi Financial Group offer, current rate or indication that a lender or the IRS would accept this exact structure.

Assume a financing provider approves:

Loan amount: USD $150,000
Assumed nominal annual interest rate: 12.50%
Term: 36 months
Payment frequency: Monthly
Origination fee: USD $0 assumed
Other legal, lien-processing, UCC, late and NSF costs: Excluded

Assume the lender requires:

USD $80,000 paid toward the IRS tax debt at closing

That leaves approximately:

USD $70,000 of gross new working capital

before any excluded costs.

The estimated monthly payment on the full USD $150,000 loan is approximately:

USD $5,018.04

Total scheduled repayment is approximately:

USD $180,649.58

Estimated interest is approximately:

USD $30,649.58

Now suppose the company generates approximately:

USD $15,000 per month of cash available after normal operating expenses and existing debt, before considering the old tax payment arrangement or the new loan.

If paying the IRS at closing eliminates the previous tax-payment obligation, approximately:

USD $9,981.96

would remain after the illustrative new loan payment.

This can potentially be stronger than keeping the tax debt outstanding and adding another loan on top of it.

But the closing mechanics matter.

The IRS says paying a federal tax debt in full is the standard way to eliminate the lien and that it generally releases the lien within 30 days after full payment. It also offers discharge and subordination procedures in qualifying situations.

A lender should therefore coordinate the actual payoff, lien-release or subordination requirements rather than assuming a wire to the IRS immediately creates the required priority.

What if the Business Owes Payroll Taxes?

Expect significantly more concern.

Payroll withholding is money collected or withheld for government remittance.

A business that uses payroll remittances to pay operating expenses can signal that ordinary working capital is inadequate.

In Canada, payroll source deductions are deemed trust amounts, and the CRA says unpaid deemed trust amounts can take priority over other creditors in important circumstances.

In the United States, unpaid employment taxes can also create federal tax liens and collection exposure under federal tax law.

A lender will want to know whether the business is now making current payroll remittances while also paying the historical arrears.

That distinction matters.

A company with an old balance under an active arrangement and all new payroll taxes current presents a different file from one where the arrears increase every pay period.

Do not use another business loan as justification for continuing to withhold current remittances.

The financing should help resolve a historical issue—not enable new tax debt to accumulate.

What if the Business Owes GST/HST?

Canadian lenders can treat this as more serious than an ordinary unsecured payable because collected GST/HST can form part of the CRA deemed trust regime.

CRA explicitly states that businesses collect GST/HST as agents of the government and that unpaid deemed trust amounts are subject to enhanced collection tools.

This can affect:

Equipment refinancing.

Sale-leaseback.

Factoring.

A/R lending.

Inventory financing.

Broader asset-based facilities.

If your business is asset-rich but cash-tight, do not assume collateral solves the tax problem.

Mehmi's Asset-Backed Lending vs Business Loans Canada explains how collateral normally supports financing, but tax priority can alter how much value another lender is actually willing to recognize.

Can Accounts Receivable Financing Work With Tax Liens?

Potentially, but lien and priority issues become central.

In the U.S., the IRS says a federal tax lien attaches to rights to business property, including accounts receivable.

A factor or A/R lender may therefore need to determine whether it can obtain acceptable priority, whether the IRS lien must be subordinated or whether a portion of proceeds should satisfy the tax debt.

The Taxpayer Advocate Service specifically notes that federal tax lien subordination can sometimes be used where a business wants to factor accounts receivable.

In Canada, CRA deemed trust claims can create their own priority issues for lenders dealing with A/R and other assets.

That means a large receivables balance is not enough.

The lender also needs to know who has first claim on the proceeds.

For the underlying financing structure, see Mehmi's Business Funding Between Customer Payments.

Can Asset-Based Lending Work?

Potentially, but tax claims can directly affect the borrowing base and collateral value.

Asset-based lending works by lending against eligible receivables, inventory and sometimes equipment.

If a government tax claim ranks ahead of the lender or creates uncertainty over proceeds, the lender can reduce availability, create a reserve, require the arrears to be paid or decline the transaction.

Mehmi's Asset-Based Lending Canada: Ultimate Guide explains why ABL availability is not simply “asset value × advance rate.” Reserves and eligibility rules can materially reduce what the borrower can actually draw.

Tax arrears can become one of those structural issues.

This is especially important in Canada when payroll or GST/HST deemed trust amounts are involved.

Can Equipment Refinancing or Sale-Leaseback Help?

Sometimes, when the business owns valuable equipment with usable equity.

A sale-leaseback can convert equipment equity into cash while the business continues using the asset.

But existing tax claims can affect the transaction.

The lessor or lender needs confidence that it can obtain the ownership or security position required for the structure.

If tax liens, deemed trust claims or other creditor interests affect the asset or its sale proceeds, those issues may have to be addressed at closing.

Mehmi's Sale-Leaseback Financing in Canada explains why lien searches, ownership records and existing payouts are central to these transactions.

Do not assume an asset is “free and clear” merely because there is no equipment loan against it.

Tax priority can be a separate issue.

What if the Tax Lien Is Against the Owner Personally?

That can still affect business underwriting.

The answer depends on business structure, guarantee requirements and whether the owner's assets or credit are relevant to the financing.

A corporation's business loan is not automatically identical to the owner's personal tax debt.

But if the lender requires a personal guarantee, personal net-worth support or owner collateral, an individual tax lien can become material.

Likewise, a sole proprietorship does not create the same legal separation between business and owner as a corporation.

Disclose the lien accurately.

Do not assume the lender will ignore it simply because the financing is described as a business loan.

Does Paying Taxes With a Business Loan Make Sense?

Sometimes.

It can make sense when the tax balance resulted from a specific temporary cash-flow event and the business now generates enough cash to support a structured repayment.

For example, a contractor may have experienced a major customer delay, used available cash to fund payroll and then fallen behind on a tax obligation. If the customer has since paid and margins have normalized, refinancing the resulting liability can potentially stabilize cash flow.

It is a much weaker situation when the company repeatedly uses payroll deductions, GST/HST or current tax money to fund ordinary losses.

A new loan does not correct that behaviour.

Before financing everyday obligations, review Mehmi's Business Loans for Daily Expenses, which explains why borrowing should bridge a temporary cash-flow mismatch rather than permanently fund a company whose expenses exceed its revenue.

What Strengthens a Financing Application With Tax Debt?

Transparency.

Provide the current balance.

Identify the type of tax.

Show the payment arrangement.

Prove that scheduled payments are being made.

Demonstrate that all required returns are now filed.

Show that current tax obligations are being remitted on time.

Then explain why the arrears developed and what has changed.

A strong explanation might say:

“The company accumulated CAD $90,000 of CRA corporate-tax arrears after a major customer extended payment terms during 2025. A formal payment arrangement is now active at CAD $7,500 per month, all 2026 filings and current remittances are up to date, and receivables days have returned to historical levels.”

That gives the lender facts to evaluate.

“CRA issue being handled” does not.

What Can Cause an Immediate Financing Problem?

Active enforcement is more difficult than an old resolved balance.

Examples include:

• Bank-account garnishment
• Active levy
• Asset seizure proceedings
• Repeatedly broken payment arrangements
• Current payroll remittances still unpaid
• Current GST/HST arrears continuing to grow
• Undisclosed tax debts discovered during underwriting
• Tax claims blocking lender collateral
• Business cash flow too weak to support both taxes and new financing

CRA says unpaid debts can lead to garnishment and seizure or sale of assets.

The IRS similarly distinguishes its lien from later levy and seizure powers.

If enforcement is already active, obtain tax and legal advice before assuming a normal business loan will solve the situation.

When Should You Wait Before Applying?

Waiting can be useful if another several months will materially improve the tax story.

Examples include:

Completing several successful payments under a new IRS or CRA arrangement.

Bringing current filings fully up to date.

Paying down a small remaining tax balance.

Demonstrating that new tax obligations are no longer accumulating.

Building several months of cleaner bank activity after the cash-flow problem was corrected.

Waiting merely to avoid disclosing the tax issue is not useful.

If the lien remains, the lender can discover it through public records, tax documents, bank activity or security searches.

FAQ: Business Funding With Tax Liens

Can I get a business loan with an IRS tax lien?

Potentially. The lender will generally review the lien amount, repayment status, business cash flow and collateral priority. It may require payoff, discharge or IRS subordination before funding.

Does an IRS payment plan remove the tax lien?

Not automatically. Payment arrangements and lien treatment are separate issues. The IRS provides specific procedures for release, withdrawal, discharge and subordination.

Can I get financing with CRA arrears?

Potentially. Expect the lender to investigate the balance, type of tax, current payment arrangement and whether CRA priority affects lender security.

Are payroll or GST/HST arrears worse than corporate income-tax arrears?

They can present different and potentially more serious collateral-priority concerns because CRA treats certain payroll deductions and GST/HST amounts as deemed trust amounts with enhanced priority rights.

Can a lender pay the tax lien directly from loan proceeds?

Potentially. Some transactions may be structured so part of the financing proceeds satisfies a tax balance or other lien as a funding condition. The exact structure depends on the tax authority, lender and transaction.

Can factoring work with an IRS lien?

Potentially, but the IRS lien can attach to business accounts receivable. Priority may need to be addressed, including through payoff or a qualifying subordination process.

Should I hide a tax balance if I am already making payments?

No. The lender needs an accurate debt and lien picture. Discovering an undisclosed tax obligation during underwriting can delay or terminate a financing request.

Should I borrow to pay taxes?

It can be reasonable when the tax problem is historical, current obligations are now being paid and the new loan produces an affordable repayment structure. It is much riskier when new tax debt continues accumulating because normal operations do not generate enough cash.

Discuss Business Funding With Tax Liens or Tax Arrears

A tax lien does not automatically answer whether a business can be financed.

The important questions are:

How much is owed?

What type of tax is it?

What collection action has occurred?

Is a payment arrangement current?

What assets or proceeds does the government claim?

And can the business support the new financing after the tax issue is addressed?

Mehmi Financial Group operates as a commercial financing brokerage and intermediary rather than a direct lender. Its current disclaimer confirms that independent financing providers establish their own underwriting, collateral, documentation and funding requirements.

To discuss a business financing request involving tax arrears or a tax lien, call Mehmi Financial Group at 833-863-4644 or use the verified Mehmi Financial Group contact page. The current page confirms the toll-free number.

Include the financing amount, U.S. or Canada, state or province, exact use of funds and timing, along with the current tax balance, type of tax, payment arrangement and any lien or collection documentation.

‍