You can get a business loan with a tax lien on file, but not through a conventional secured bank loan unless you first get the IRS to move out of the lender’s way. The federal tax lien sits ahead of almost every creditor who comes after it, so a new bank cannot take the first-priority position it needs to underwrite the loan. The workable paths are two: get the IRS to rearrange or remove its claim through a specific certificate, or use a financing product that does not depend on taking a senior security interest in your assets.
Why Banks Decline When a Lien Is on File
The problem is priority, not just risk. Once the IRS files a Notice of Federal Tax Lien, that lien is valid against virtually all later creditors under federal law.1Office of the Law Revision Counsel. 26 USC 6323 – Validity and Priority Against Certain Persons The lien itself arises the moment you owe the tax and the IRS demands payment, and it attaches to everything you own or later acquire: equipment, inventory, real estate, receivables, patents, even future revenue.2Office of the Law Revision Counsel. 26 USC 6321 – Lien for Taxes
A commercial lender making a secured loan needs to be first in line if you default. When the government already holds that position, the lender’s collateral is spoken for. The bank cannot liquidate your equipment or collect your receivables ahead of the IRS, so there is effectively nothing securing the loan. Strong revenue does not fix this; it is a structural barrier under most banks’ lending policies.
There is a reputational layer too. A filed lien tells underwriters you fell behind on taxes far enough for the government to make a public claim, which reads as a cash flow problem at minimum. In many banks, the lien triggers an automatic decline before anyone looks at the rest of the file.
Resolve the Debt With the IRS First
No serious lender will engage until you have taken formal action on the tax debt itself. Two tracks matter.
Installment Agreement
An installment agreement lets you pay the debt monthly instead of in a lump sum. For businesses owing $25,000 or less in combined tax, penalties, and interest, the IRS offers a streamlined online application for monthly payment plans of up to 24 months.3Internal Revenue Service. IRS Self-Service Payment Plan Options Larger balances require Form 9465 or a call to the IRS, detailed financial statements, and payments sized to clear the debt before the 10-year Collection Statute Expiration Date.4Internal Revenue Service. Topic No. 202, Tax Payment Options
An approved agreement does two things for a loan application. It holds off aggressive collection action like levies and seizures, and it moves you from ignoring a tax problem to managing one in a lender’s eyes.
Offer in Compromise
An Offer in Compromise settles the debt for less than you owe. The IRS accepts them when it concludes it is unlikely to collect the full amount, either because your assets and income cannot cover it or because the liability is genuinely disputed. The application requires a comprehensive collection information statement, and the IRS rejects more offers than it accepts. Review can take months.
An accepted and completed OIC is stronger than an installment agreement from a lender’s perspective because the debt is resolved rather than pending, and the lien gets released on completion. The tradeoff is time, which is why many owners run an installment agreement in parallel while they need capital now.
The Three IRS Certificates That Open the Door
Beyond a payment arrangement, three IRS tools directly address the priority problem that blocks secured lending. Plan ahead on timing: the IRS recommends submitting subordination and discharge applications at least 45 days before you need the certificate.5Internal Revenue Service. IRS Publication 784 – How to Apply for a Certificate of Subordination of Federal Tax Lien
Subordination
Subordination is the tool most directly aimed at getting a new business loan. The lien stays in place, but the IRS agrees to let a specific new lender jump ahead of the government on designated collateral, giving the lender the first-priority position it needs.6Office of the Law Revision Counsel. 26 USC 6325 – Release of Lien or Discharge of Property
The IRS will consider subordination when the new loan either increases the value of property already subject to the lien or helps you pay down the tax debt. You submit a lender commitment letter specifying loan amount, repayment terms, and the exact collateral, along with an appraisal showing the government’s interest is not harmed. The IRS wants to see that the loan has a legitimate business purpose and does not simply push the government further down the priority list for nothing.
Discharge
A discharge removes the lien from one specific piece of property. It is useful when you are selling an asset and need to deliver clear title, or when you want to free up a particular asset to pledge as unencumbered collateral.
The IRS grants discharge most commonly when you pay the government an amount at least equal to its interest in the property being released. Alternatively, it will discharge property if the fair market value of your remaining assets still subject to the lien is at least double the combined amount of the unpaid tax debt plus any liens with higher priority.7Internal Revenue Service. IRS Publication 783 – How to Apply for a Certificate of Discharge From Federal Tax Lien
Withdrawal
Withdrawal is the strongest of the three for borrowing purposes. Rather than rearranging priority or freeing one asset, it removes the public Notice of Federal Tax Lien entirely. You still owe the tax, but the public record disappears, which eliminates both the credit reporting damage and the automatic red flags in a lender’s public records search.
One route to withdrawal is a Direct Debit Installment Agreement with at least three consecutive on-time electronic payments. To qualify through that route, your aggregate unpaid assessment balance must be $25,000 or less, the agreement must fully pay the debt within 60 months or before the Collection Statute Expiration Date, and you must be current on all other filing and payment obligations.8Internal Revenue Service. Internal Revenue Manual 5.12.9 – Withdrawal of Notice of Federal Tax Lien The IRS also withdraws lien notices after the debt is fully satisfied, and in cases where the Taxpayer Advocate determines withdrawal is in the best interest of both the taxpayer and the government.9Taxpayer Advocate Service. Applying for Withdrawal of Notice of Federal Tax Lien
Short of paying the debt in full, a withdrawal is the best outcome for your borrowing prospects. From a public-records standpoint, it puts you back on the footing of a business that never had a lien filed.
SBA Loans Deserve Separate Attention
SBA lenders are required to verify that applicants are current on all federal, state, and local taxes. An unresolved tax lien or outstanding delinquent federal debt typically results in an automatic decline.
An approved IRS installment agreement may satisfy this requirement, depending on the lender’s interpretation and the specific loan program, but the window is narrow. Some lenders treat a filed lien or judgment as a separate disqualifying event beyond simple delinquency. If SBA financing is the goal, the safest sequence is to pursue a lien withdrawal with the IRS before you apply, so the tax situation reads as a payment plan rather than an active government claim against your assets.
Financing That Works Around a Tax Lien
When conventional bank financing is not available, or while a subordination request is pending, several products either sidestep the priority problem or accept it in exchange for higher pricing.
Accounts Receivable Factoring
Factoring is not a loan. A factoring company buys your outstanding invoices at a discount, advancing 80% to 90% of face value up front and releasing the balance, minus fees, when your customer pays. Because this is a purchase of an asset rather than a loan secured by one, the factor underwrites your customers’ ability to pay, not your balance sheet or tax posture.
Fees typically run 1% to 5% of invoice value per 30 days outstanding. A $50,000 invoice at a 3% monthly rate costs $1,500 if the customer pays within 30 days. Slow-paying accounts get expensive fast, but factoring remains one of the most accessible options for businesses with an active lien.
Merchant Cash Advances
A merchant cash advance provides a lump sum in exchange for a fixed share of future sales, collected as daily or weekly deductions from your bank account or card processor. MCAs do not take a traditional security interest in your property, so lien priority does not directly block them.
Pricing is expressed as a factor rate, typically between 1.1 and 1.5, meaning you repay $1.10 to $1.50 for every dollar advanced. On a six-month repayment schedule, a 1.3 factor rate translates to an effective annual cost north of 60%. MCAs are fast and broadly accessible, but the math is punishing. A business already carrying tax debt should think hard about whether adding expensive capital on top makes the situation better or worse.
Asset-Based Lending
Asset-based lenders advance working capital secured by specific assets, usually accounts receivable and inventory, often after a field audit of your receivables management and inventory systems. Advance rates run around 85% for qualifying receivables and up to 50% for inventory.
The catch: ABL lenders still need to be first in line on the collateral they are financing. In practice that means you will need a lien subordination from the IRS before the lender will fund, so the ABL lender’s UCC filing sits ahead of the government on the specific receivables and inventory. ABL with subordination is one of the more practical routes to conventional-looking business credit while a lien is active.
Private and Hard Money Lending
Private and hard money lenders operate outside bank regulatory constraints, which lets them accept a junior position behind the government. They price the risk accordingly, often at 10% to 18% annually and higher for difficult situations, with 12- to 36-month terms. Expect a personal guarantee and often collateral outside the business, such as a lien on the owner’s residence.
This is last-resort capital. It makes sense only when the borrowed funds will generate enough return to cover the cost and improve your overall position, such as a bridge loan to finish a profitable project whose proceeds pay down the tax debt. Taking on expensive private debt just to keep operating while the lien festers tends to deepen the hole.
Never Hide the Lien on a Loan Application
Lenders run public records searches as a matter of standard due diligence, so the lien will almost certainly surface. If it does not, and the lender later discovers you omitted it, the consequences go well beyond losing the loan.
Making a false statement on a loan application to a federally insured financial institution is a federal crime under 18 U.S.C. ยง 1014, carrying penalties of up to $1,000,000 in fines and 30 years in prison.10Office of the Law Revision Counsel. 18 USC 1014 – Loan and Credit Applications Generally For SBA-backed loans, which carry a federal guarantee, the exposure is even more direct. Beyond criminal liability, the lender can declare immediate default, accelerate the full balance, and pursue the personal guarantee, all on top of the tax debt that started the problem.
Disclose the lien, present your IRS resolution plan, whether an installment agreement, a subordination request, or an OIC, and let the lender work with the facts. A lender who understands the IRS tools available may still find a way to fund. A lender who finds out you lied will not.