A step-by-step guide to using a loan for tax payments

Key takeaways:

• Financing tax payments can help preserve working capital when your business faces a larger-than-expected tax bill or needs to prioritize cash for other goals.
• Traditional loans may offer favorable rates, but they can take time to approve and may come with rigid repayment terms that affect future cash flow.
• Alternative financing options, including tax-focused lines of credit, can offer faster access to funds and more flexibility for meeting tax deadlines without disrupting operations.

For many businesses, taking out a loan to pay taxes is a calculated move to preserve working capital for the year ahead. You might consider a financing option because your tax bill is larger than expected or because you want to strategically utilize your cash to meet other goals.

This guide breaks down the end-to-end process for financing tax liabilities so you can feel confident navigating each step.

1. Clarify your tax obligation

Information is power when it comes to your money. Many factors can inform your tax obligations. As a small or midsize company, you’ll want to look at:

• The kinds of taxes you owe, including sales tax obligations.
• Jurisdictions dictating your tax obligations.
• Number breakdowns that include penalties and interest projections.
• Due dates and inflection points, like triggers for additional fees.

Owing taxes in more than one jurisdiction is one of the most common reasons tax bills may come as a surprise. If you operate or do any sales across state lines, it’s important to review where you may have tax obligations.

Once you have a picture of your tax obligations, consider those numbers alongside your overall business process and goals. It’s critical to identify cash flow priorities and determine the urgency or flexibility for making tax payments as you move forward.

2. Evaluate traditional financing methods

Many businesses first look to traditional financing methods like loans for taxes. While leaning on familiar tactics may feel easier, traditional financing can often introduce greater hurdles — especially when time is tight.

Think carefully about whether a traditional loan meets your needs in this situation. Consider:

• Which performance signals lenders look for and whether you meet those metrics.
• How large your tax obligations are.
• What borrowing limits your creditworthiness qualifies you for.
• Timing of tax obligations and loan applications.
• Any risks, including fees or interest rates, that may affect your business goals.

Traditional loans can save you money but cost you time. While Small Business Administration (SBA) or bank loans offer the best rates, the amount of paperwork and long wait times — often a month or more — can be a dealbreaker if you’re facing a tight deadline. Larger loans or unsecured loans often take a while to approve and process as well.

Once you have access to the money, lending terms will dictate how you can spend it (on tax obligations or otherwise) and what your responsibility is for paying it back. Traditional loans typically come with rigid due dates and strict payment amounts that affect future cash flow.

3. Compare alternative financing options

What happens when traditional lending doesn’t fit your timeline or your needs? Loans aren’t your only options for tax payments. You can speed up your access to cash and find flexibility in options like credit cards or lines of credit.

Credit card

If you already use a credit card for business expenses, it may seem like a logical option for your tax payments. It’s quick, convenient, and accessible. But whether a credit card is the best way to pay business taxes depends mainly on the amount of taxes you owe.

Credit cards have high interest rates that compound quickly, so they aren’t ideal for large or even midsize tax liabilities. Paying taxes with a credit card typically only makes sense for small amounts you can pay off right away.

Line of credit

A revolving line of credit can be much more flexible than a one-time loan payment. If you already have a line of credit open, you may be able to use it to pay your taxes. When it comes to taxes, however, a new line of credit has many of the same drawbacks as a loan.

The approval process for a line of credit with a traditional bank takes several weeks in many cases. Eligibility may also depend on what you propose using the credit for, and tax obligations may not necessarily qualify you for lending.

Avalara Capital

Unlike a broad line of credit, a focused line of credit designed specifically for taxes has fewer downsides. With an embedded financing solution like Avalara Capital, your request for funds can be processed quickly — think minutes, not days — giving you access to cash on a timeline that meets your tax obligations.

Avalara Capital is a working capital solution for Avalara users. You can access funds in a day and use them to pay your tax bill or address other cash flow needs at any time. Because Avalara Capital is embedded into Avalara AvaTax, you skip the lengthy and invasive financing process. Instead, you combine tax compliance insight with your financing, all in one place.

4. Satisfy your tax liabilities

Once you have the logistics in place for a loan or alternative financing method, it’s time for the practical steps. Receive your funds and pay your bill, but make sure you follow through in a way that supports business health.

Move forward with these factors in mind:

• Timing. Payout speed should be coordinated with tax deadlines so you don’t face any extra fees or interest. Choose a financing method that gets money into your account with adequate time to proceed on schedule.
• Documentation. Paying taxes with a loan or alternative financing doesn’t usually require you to submit extra tax documents to the relevant departments of revenue, but you should retain documentation for your own records. Update your accounts to accurately reflect cash flow and keep documents like bank paperwork in your files.
• Repayment. Make a plan to manage repayments alongside normal operations. You may have to adjust business plans or financial forecasts as repayment progresses.

Financing or loans to pay the IRS or state revenue departments are most helpful when thoughtfully applied to align with your business goals. As you navigate the next fiscal year, take a close look at your jurisdictions, obligations, and available tools for managing cash flow.

Turn tax liabilities into growth opportunities

Choose Avalara Capital for compliance-ready, on-demand tax liability financing.

Get approved from your AvaTax dashboard and use Avalara Capital as a fast, secure year-round line of credit.

FAQs

Can a business use a loan to pay taxes?

Yes, many businesses use loans or other financing options to pay tax liabilities. Financing can help preserve working capital, especially when a tax bill is unexpectedly large or due before cash is readily available.

What should I know before financing a tax payment?

Start by clarifying how much you owe, which jurisdictions you owe taxes in, when payments are due, and whether penalties or interest may apply. From there, compare financing options based on timing, cost, repayment terms, and how they fit into your broader cash flow needs.

Is a traditional business loan the best option for paying taxes?

A traditional business loan may work well if you have enough time to apply, qualify, and receive funds before your tax deadline. However, bank and SBA loans can involve significant paperwork and longer approval timelines, which may not be ideal if payment is due soon.

Can I pay business taxes with a credit card?

In some cases, yes. A credit card may be convenient for smaller tax bills that can be paid off quickly. For larger liabilities, high interest rates can make credit cards a more expensive option over time.

How can Avalara Capital help with tax payments?

Avalara Capital gives eligible Avalara users access to a working capital solution directly through Avalara AvaTax. It’s designed to help businesses access funds quickly for tax payments or other cash flow needs without going through a lengthy traditional financing process.