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.