What are VAT loans?

Dealing with VAT payments can major real headache for smaller UK businesses, especially when cash flow is tight. Although charging VAT is a legal requirement for businesses with a turnover of £85,000 or more, making those payments on time can be challenging when unexpected costs arise.

Failing to pay VAT on time isn’t an option. HMRC can impose fines and take steps to recover the funds. Planning ahead by setting aside VAT in a separate account can help, but sometimes that's not enough.

When you're facing a VAT payment and your cash reserves are low, a VAT loan might be the solution you need, helping you meet your obligations without straining your finances.

What are VAT loans?

Value Added Tax (VAT) loans are a form of short-term business loan that help you spread the cost of your VAT bills over 3 months to give you flexibility and some breathing space. They’re here to help you budgeting, managing cash flow, and avoiding penalties for late payments. The terms of VAT loans vary depending on the lender, sometimes requiring collateral or a personal guarantee, and may come with higher interest rates than other types of loans. 

There are alternative funding options on the market such as business loans, invoice financing or merchant cash advances that may have more flexible repayment terms and lower interest rates.

How do VAT loans work?

If you decide to opt for a VAT loan and submit an application, the procedure is quite simple. After a successful application, your loan company will make a payment directly to HMRC. You'll then have to pay back your loan across a period of 3-12 months, typically.

Why would a small business need a VAT loan?

If your small business has a turnover exceeding £85,000 from supplying VAT-rated goods or services within any 12-month period, you must register for VAT with HMRC.

• As a registered business, it’s your job to collect VAT on behalf of HMRC through the goods and services you sell, then pay this collected VAT to the government regularly, typically every quarter.
• VAT-registered businesses can also reclaim VAT they’ve paid on eligible expenses, like raw materials or services. The difference between the VAT collected and reclaimed is what’s owed to HMRC.

However, unexpected costs can arise, and sometimes you might find yourself low on liquid capital when it becomes time to pay your VAT bill. Scenarios might include:

• An increase in the price of your products or raw materials
• Economic dips that reduce your revenue
• Unexpected expenses, such as building upgrades

In these circumstances, a VAT loan can make the difference between paying your bill on time, or getting fined for non-compliance. 

Are VAT bridging loans the same as VAT loans?

Bridging loans, while sounding similar, are actually different. You use them to cover the VAT cost on the purchase of a commercial property. Since real estate can be so complex, VAT costs for real estate purchases can pop up much later in the buying process. And given how expensive properties are, the cost of VAT can be eye-watering. Because of this, investors often use VAT bridging loans to secure the sale of a property.

The pros and cons of VAT loans

If you're in a tight spot with your VAT payments, a VAT loan may be just what you're after. But before you decide if a VAT loan is right for you, here are a few pros and cons to think about:

Advantages of a VAT loan

• HMRC gets the money directly
• You pay your VAT bill in instalments, rather than a lump sum
• Can free up cash flow for your business

Disadvantages of a VAT loan

• Repayment is relatively short - up to 12 months
• Because they are short-term business loans, they can be more pricey.

VAT loan providers

There’s no shortage of VAT loan providers in the UK. Some of the most popular lenders include:

Braemar Finance

• Offers VAT as well as business tax loans
• VAT loan terms up to 3 months
• Get access to a quarterly drawdown
• Online application

Bluestar Leasing

• Also offer VAT and business tax loans
• VAT loan for a maximum term of 3 months
• Loans start from £25,000
• Need to have been trading for 2 years minimum

Merchant Money

• Short-term loans of 1-6 months
• Maximum term up to £150,000
• 90% approval rate
• No hidden fees

Do you pay VAT on a loan?

You won't have to pay VAT when you take out a business loan, as the interest on business loans is not subject to VAT.

What are the alternatives to VAT loans?

Keeping your cash flow consistent can be tricky, especially when bills are due. With the right loan, you don't have to worry about falling behind on your VAT. Of course, getting a VAT loan isn't the only option. If you're looking for something with a little more give, take a look at our Flexi-Loan - a unique solution tailored to small businesses like yours. The money you need, when you need it.

Alternatively, a Revenue-Based Loan allows you to borrow money and pay it back at a rate relative to your business earnings, provided you meet a minimum threshold. If your sales are steady, these types of loans can be a lifesaver.

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