revenue-based financing Archives

Using Business Loans to Cover Your Taxes

by Vince Calio8 minutes / February 29, 2024

As a small business owner, you may run into a crisis every now and then, and one of those crises could be a surprise tax bill. This situation may arise if you didn’t file your quarterly taxes properly or you spent a long period of time charging incorrect sales tax rates. Figuring out how much you owe to the IRS or your state can be a complicated process and while you want to try to avoid them at all costs, mistakes can and do happen.

If your business is stable but you get a surprise, overdue tax bill that you can’t immediately cover, one of your options is to get financing to pay it. Financing, perhaps in conjunction with a tax relief service that can help negotiate a settlement on your behalf, can get you over the hump and avoid the ugly possibility of having a lien put on both your personal and business finances or, worse yet, your business going under due to an unmanageable tax burden.

What Kind of Financing Can You Use?

There are certain types of financing you can apply for to pay your taxes, but first, it should be noted that there are others that you won’t be able to use. Specifically, bank and SBA loans are out of the question to try and pay off tax debt. Both of those financing tools will require you to provide a specific reason as to why you need to borrow money, and lenders will not consider having to pay off taxes a valid reason.

So what financing options are you left with if you have to pay off a large tax bill? The best ones are those that allow your small business the flexibility to use borrowed funds for whatever purpose it needs to, while also offering convenient payback options.

A business line of credit. A business line of credit is perhaps the most flexible and affordable way to immediately pay an unexpected tax bill. It is a set amount of credit that you can borrow against at any time for any reason, and interest is only charged on the amount you borrow. Both traditional banks and alternative lenders offer lines of credit. For an unsecured line of credit, however, you will need a strong credit score, and for a secured line of credit, you will need to put up collateral.
A working capital loan. A working capital loan is a short-term loan (often up to six months) that gives you a lump sum of cash upfront to pay for immediate operational expenses such as payroll, rent, and, yes, taxes. This type of financing typically charges a higher interest rate than a bank loan but comes in handy if you have consistently strong cash flow but can’t immediately afford to pay for upfront expenses. Working capital loans are usually offered by alternative lenders.
Revenue-based financing. Revenue-based financing (RBF) can give you a lump sum of cash upfront in exchange for a portion of your future receipts, which is referred to as a “factoring fee.” This can be a good option if your business has a strong sales history but is hit with a large, unexpected tax bill that needs to be paid off quickly. The drawbacks are that the factoring fees are usually significantly more expensive than the interest charged on a bank loan or business line of credit.

Additionally, RBF is offered exclusively by alternative lenders, but since it’s less regulated than other types of financing, you have to watch out for bad actors. If you opt for RBF, make sure you are dealing with a reputable lender by checking reviews and doing the proper due diligence.

Invoice factoring. Invoice factoring is when a lender gives you a portion of the cash you are owed for unpaid invoices. This can be a flexible option for you if your business is owed a large amount of cash from customers who are slow to pay or if you can’t afford to wait until the payment due date on your customers’ outstanding invoices.

Much like RBF, invoice factoring can be more expensive than a bank loan or line of credit since it charges a factor fee, but it does provide convenience because it will give you cash upfront to immediately pay your unsettled tax bill. Additionally, when applying for invoice factoring, your credit rating matters far less than it would when applying for a bank loan or line of credit since the lender considers your customer’s creditworthiness over yours.

A home equity line of credit. If you have an unpaid business tax bill that you need to pay off quickly, desperate times may call for desperate measures. One of your options may be a home equity line of credit. If you own your own home, a traditional bank can give you a line of credit against the equity you have in your home. This can give you quick cash to settle a large tax bill, but should only be used if your small business is doing well and you’re confident that you can pay yourself and your bank back, otherwise, you could face a foreclosure on your home.

Financing May Not be an Option

In some cases, if you have a large, unexpected tax bill, it usually isn’t a good idea to use financing to pay that bill, as it may put you in a financial hole that you can’t get out of. In this case, you may have no choice but to declare bankruptcy and start over.

However, the IRS would rather get something than nothing, so another option may be to try to negotiate with the IRS on a payment plan for a reduced amount. There are also reputable tax attorneys who can negotiate with the IRS to try to reduce your tax debt and create a manageable payment plan with them. These could be better options for you if your unpaid tax situation is severe enough.

How to Avoid Large Tax Bills

While there are financing options available to you if you suddenly get an unexpected tax bill, using financing to pay your taxes is not a scenario that you want to be in, and it means you’re not operating your books the way you should be. Still, it’s no secret that running a small business isn’t easy, and one of the more complicated aspects of it is declaring your income and figuring out how much you owe in taxes every quarter.

Whether you operate as a sole proprietor or an llc, it’s strongly recommended that you:

Keep careful records of your transactions. Poor bookkeeping is one of the most common ways small business owners can get into trouble with the IRS. Make sure you record every sale that you make every quarter along with the amount of sales tax that you owe on it. If you’re a sole proprietor or run a pass-through business, proper bookkeeping will give you a clear paper trail to determine how much you owe in both business and personal taxes. Hiring an experienced bookkeeper and/or account can help you with this.
Make sure to remit your payroll taxes. The IRS reported that in 2022, 31% of unpaid taxes from small businesses resulted in the failure to pay part or all of their payroll taxes. If you have employees and take payroll tax out of their paychecks, you are required to set aside those funds and pay them to the IRS on a quarterly basis. Some small business owners may be tempted to use those funds on immediate business expenses with the intent of paying that tax later. It is highly recommended that you don’t fall into this trap, as the IRS can be relentless in enforcing penalties for not paying those taxes on time.
Classify your workers properly. Some small business owners may get confused when classifying their workers as independent contractors and employees, with some classifying part-time workers as independent contractors rather than employees. Each has different tax classifications, and misclassifying them – even if it’s an innocent mistake – can lead to huge fines by the IRS. If you are confused by the difference between an employee and an independent contractor, it’s best to refer to the IRS’ definition of each.
Keep up-to-date on deductions. Make sure you or your accountant stay up-to-date on what expenses can and cannot be deducted as a business expense, as the IRS often changes its guidelines on an annual basis. One of the most frequent ways small businesses get into trouble with taxes is by overstating their deductions, or not understanding what is and isn’t deductible.
Make sure you have good accounting software or a reputable accountant. Even if you believe that you know what you’re doing when it comes to bookkeeping, you should still have very good business accounting software. Some of the top-rated business accounting software includes QuickBooks, Zoho Books and Oracle NetSuite.

Don’t Wait Until it’s Too Late

Getting a surprise tax bill is unpleasant, but you do have convenient financing options to pay that bill. It’s strongly recommended, however, that you consider all of your options to carefully determine if using financing is the best choice. No matter the case, however, you also need to figure out why you got into trouble with your taxes in the first place – be it poor bookkeeping, overstating your deductions, and so on – and avoid running into that problem again.

Vince Calio

Content Writer

Vince Calio has been a writer for Kapitus since 2021. Before that, he spent three years operating a dry-cleaning store in Rahway, NJ that he inherited before selling the business, so he’s familiar with the challenges of operating a small business. Prior to that, Vince spent 14 years as both a financial journalist and content writer, most notably with Institutional Investor News and Crain Communications.

6 Business Alternatives for Bank Loans and When They Make Sense

Manage Your Money

by Wil Rivera6 minutes / July 22, 2019

Need financing for your business but can’t qualify at a bank? There are various financing alternatives to keep your operations running.

Borrowing money is an essential part of building a small business. But when you need a loan, traditional lenders like the bank might not be an option. They tend to have strict small business lending standards. For example, you need established business credit, collateral and detailed financial statements for bank loan approval. This is a difficult hurdle for companies that have only been around for a couple years. Fortunately, as a business owner, you have other options, with a number of business alternatives for bank loans on the market today.

These alternative options can be your financing lifeline until you build enough of a financial track record to qualify for more traditional financial products.

LET’S TAKE A LOOK AT THESE BUSINESS ALTERNATIVES FOR BANK LOANS AND WHEN THEY MAKE THE MOST SENSE.

1 – Online Loans

Banks aren’t the only ones lending money. Alternative and online lenders are also a quality source of small business financing. They offer stand-alone cash flow loans that you can invest into your business and spend however you choose. If you want more flexibility, you could also open a line of credit. A line of credit lets you borrow, pay the money back and re-borrow again as many times as you want.

It’s easier to qualify for loans from alternative lenders because their requirements are not as strict as with banks. Another advantage is you often don’t have to secure the loan with your future business revenue or other collateral. However, your business will need to meet some standards like stable revenue and a good business plan for how you will use the loan proceeds.

Best fit for: A business with stable revenue looking to borrow cash quickly, without putting up collateral.

2 – SBA Loans

Another way to borrow is through the Small Business Association. This government organization assists small business owners and one of their services is to help them qualify for loans. The SBA doesn’t actually lend money. Instead they agree to back a certain percentage of the loan, guaranteeing repayment to the lender. This makes the lenders more likely to accept your application.

SBA loans can be a great tool provided you can qualify. The process does take time and you’ll need to submit, at minimum, similar documents that you would include as part of a bank loan application – such as a business plan, bank statements and your credit report.

Understanding the SBA system can improve your chances of qualifying so be sure to work with a lender that regularly works with these types of loans.

Best fit for: A business that can meet the SBA standards for a loan and also knows a lender that understands the application process.

3 – Equipment Financing

If your small business needs money specifically to buy a new piece of equipment or machinery, then equipment financing could be the answer. These small business loans can only be used to buy an asset, which also counts as the loan’s collateral. This makes it easier to qualify because if you end up not paying off the debt, the lender can take back the equipment as repayment.

With this type of financing, you can often buy new equipment with no money down but you’ll still receive the full tax break for the business investment, as if you bought the equipment with cash. You can also set up the financing as a lease which would let you replace the equipment earlier with new versions as they come out.

Best fit for: Buying or leasing new equipment for your business.

4 – Purchase Order Financing

A lack of cash can put even thriving businesses in trouble. 52% of small business owners had to forgo a project or sales worth $10,000 because of insufficient cash, according to an Intuit Quickbooks survey (slide 2). If you’ve got a project lined up but need some extra money to make it happen, purchase order financing could be the answer.

These short-term loans cover up to 100% of your supplier costs if you can show that you’ve got an order that will turn things around. Once you make the sale, the lender will deduct their fees from the proceeds. That way you still fulfill your order without taking on any extra debt. And since you can prove that you’ll be able to pay the money back quickly this financing is easier to qualify for. You just need to prove the upcoming purchase order.

Best fit for: When you’ve almost completed a sale and need a quick cash infusion to reach the finish line.

5 – Invoice Factoring

After you make a sale, your job still isn’t done because you you’ll need to collect payment. This can take between 30 to 90 days, depending on your payment terms. And, as many know, it could take even longer when customers miss payment deadlines. Not to mention there’s always the risk they don’t pay.

If your invoices are piling up and you need cash, invoice factoring could be the solution. You transfer over an unpaid invoice to a financing company, called the factor, and they’ll give you an advance on the payment.

From there, the factor takes over collecting from your clients. Once they get paid, they’ll give you the rest of the invoice amount minus their fee, which could be as little as 1.5% of the invoice amount.

Best fit for: A business with unpaid client invoices that wants to improve cash flow.

6 – Revenue Based Financing

Revenue based financing is the last of our business alternatives for bank loans. These loans have a simplified and fast application process, a great solution if your business needs money now. Lenders can approve this financing quickly because they just look at your historic revenue and how long you’ve been in business. They use this to forecast your future cash flow.

Based on that, they’ll give you a lump sum of cash. The lender will then collect a set percentage of your future sales on a daily or weekly basis.

Best fit for: A business with a proven history of revenue that needs money but does not want to go through a lengthy loan application process.

Don’t let a bank loan rejection discourage you from raising the money your business needs. As you can see, there are plenty of alternatives. If you have any questions to figure out which of these solutions is the right fit, reach out to a loan specialist today.

Wil Rivera

WD

How It Works: Revenue Based Financing

Manage Your Money

by Bernadette Abel4 minutes / March 7, 2018

KEY TAKEAWAYS

Revenue-based financing provides small businesses with quick access to capital. But, it is not a loan. Instead is a purchase of your future sales.
With quicker approval times and lower credit score requirements, revenue-based financing can be a great financing option. But, it will directly impact daily cash flow as a percentage of your daily or weekly sales are deducted as repayment.
This form of financing is ideal for businesses with an immediate need for funding, those without adequate collateral, or those not meeting the criteria for traditional loans.

Are you looking for small business loan and alternative financing options?

This is by far the most frequently used option for small business financing. Revenue-based financing allows small businesses to take financing against their continued business success. The oldest form of revenue-based financing is the popular Merchant Cash Advance (MCA). This option truly aligns the interests of both parties. That’s because the financing partner only gets paid if the small business continues to be viable and successful.

It is no wonder then that merchant cash advances continue to see a healthy increase

A 2016 report on Merchant Cash Advance/Small Business Financing Industry byBryant Park Capitalnotes that, “the volume of merchant cash advances provided to U.S. SMEs has steadily increased over the last couple years, projected to reach $15.3 billion in 2017, up from an estimated $8.6 billion in 2014.”

Not surprising, considering quick upfront capital can make a huge difference to any small business. Typically, revenue-based financing provides a lump sum of cash to a small business. This is with the understanding that it will dip into a fixed percentage of the future sales. It’s a great option for any small business owner who is looking at short-term financing (between 6-18 months), cash flow and working capital.

A few years back, merchant cash advances were limited to those businesses that received customer payments via credit or debit cards – like bars, nail salons, restaurants, retailers, and other forms of B2C companies. But now, with advancements in the system, merchant cash advances can work for almost any type of small business.

While merchant cash advances give your business that financial backup, it’s also important to know that it directly impacts your daily/weekly cash flow. Good lenders ensure that the funds they advance to merchants ensure healthy growth in the business even when daily/weekly remittances are being taken from the business’s revenue stream. Uninformed merchants can easily fall prey to unscrupulous lenders who can overburden a business’s cash flow. Therefore, small businesses applying for a merchant cash advance should first make an objective analysis of whether this service is best suited for their business.

What you should know about revenue-based financing

Quick access and faster approval of the application.
Much lower credit score requirement compared to a traditional loan.
Qualification does not require secure assets.
A fraction of the company’s daily/weekly sales goes toward its outstanding financing amount.
Supports payments to be processed against both credit card and cash payments (ACH).
Instead of fixed monthly payments regardless of the business performance, the remittances are tied to the success of the business.
Flexibility of daily/weekly payments with the ability to true-up payments against the actual performance of your business provides peace of mind and extra cushion when times are lean.
There is an immediate impact on your business cash flow.

Revenue-based financing may be a good option when:

The small business will not meet SBA loan requirements.
There is an immediate need for funding.
The company does not have enough collateral for traditional long-term loans.

Revenue-based financing may not be an option when:

The funds will provide only temporary reprieve but cause irreparable harm to cash flow.
The business already has a number of outstanding loans or advances.
Your credit score is below 550. In this case, alternate options like Factoring may be more appropriate.

It’s important to remember that unlike other traditional loan options, which are usually backed by a collateral or federal guarantee, this financing type presents a great risk to the alternative lender. That is why it is a more expensive financing option compared to traditional loans. Businesses should therefore thoughtfully consider when this option makes sense for them and carefully vet the alternative lender.

Tag Archive for: revenue-based financing

Using Business Loans to Cover Your Taxes

Using Business Loans to Cover Your Taxes

What Kind of Financing Can You Use?

Financing May Not be an Option

How to Avoid Large Tax Bills