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

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.

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.

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.

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.

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.