Should You Use A Merchant Cash Advance To Pay Your Taxes? Three Tips To Help You Decide

For many Americans, tax season is a joyous time of tax returns, but for the self-employed, tax refunds tend to be an anomaly. Instead, you often have to pay in. If you are facing a tax bill but you don't have the money to cover it, you may be wondering if you should use a merchant cash advance. Here are some tips to help you make your decision.

1. Compare Merchant Advance Fees to Fees for Paying Taxes Late

To help make your decision, start with a simple financial comparison. Namely, you should compare the service fee on the loan to the late fee you will have to pay if you don't pay your taxes on time. The Internal Revenue Service charges a late payment fee of 0.5% of your tax owed every month until you pay the tax. That fee can go up to 25% of your total tax bill. Note that's just the fee for paying late. If you also file late, you receive additional penalties, which are much higher.

To illustrate how to compare the costs, imagine that you owe $1,000 in tax. You don't think you will be able to pay the balance for another six months. In this case, your monthly fee for paying taxes late is $5. Over six months, that equates to $30. If the fee on the merchant advance is less than that, you may want to take out the merchant advance.

2. Consider What You Want Reflected on Your Credit Report

In most cases, paying your taxes late is not reflected on your credit report right away, but after a while, the IRS may notify the credit reporting agencies of your failure to pay. At that point, the debt may be noted on your credit report. If you are trying to buy a home or a car and you want your credit report to stay as pristine as possible, you may want to opt for a merchant advance instead. Typically, these lenders do not check your credit report when assessing your loan application, but they also do not post details about the loan on your credit report.

3. Make Sure You Can Afford the Repayment Plan

Merchant cash advances often set up your repayment schedule based on your current sales, and in many cases, you pay a percentage of your current sales. Before taking out a loan to cover a tax obligation or anything else, you should make sure that you can handle the repayment plan. If you think the payments will strain your budget, you may want to see if you can work out an easier repayment plan with the IRS.