What To Know About VAT Finance

What is a VAT Loan?

A VAT loan is a relatively niche form of business finance that is becoming increasingly popular as businesses look for more flexible ways to manage VAT obligations and preserve cash flow.

A VAT loan helps bridge the gap between when a business is required to pay Value Added Tax (VAT) to HM Revenue and Customs (HMRC) and when it receives or generates the capital needed to meet that liability. Rather than using a significant amount of working capital in one payment, the business can spread the cost through regular instalments over an agreed loan term.

At a Glance: Key Benefits of VAT Finance

• VAT finance can support cash flow by allowing working capital that would otherwise be used to settle a VAT liability to remain available within the business.
• Enness can arrange VAT finance quickly, including for substantial VAT liabilities. This can be useful where a business wants to avoid late payment penalties or preserve capital for other investments and projects.
• VAT finance can be competitively priced and may, in some circumstances, offer a more suitable alternative to raising capital through other types of business finance.
• VAT funding can be particularly useful for businesses that experience seasonal fluctuations in revenue and have varying levels of available working capital throughout the year.
• VAT loans can be used by businesses that pay VAT monthly or quarterly, as well as for significant one-off VAT liabilities, such as those arising from the purchase of a commercial property.

Eligibility for VAT Finance

VAT finance can be available to businesses of different sizes, with relatively few restrictions on the types of companies that may apply. Generally, businesses will need to be VAT-registered in the UK and demonstrate a financial position, credit profile and cash flow that support the proposed borrowing.

Loan sizes can vary significantly. Some lenders offer facilities of only a few thousand pounds, while successful small and medium-sized enterprises (SMEs) may require funding of around £50,000. Larger businesses with more substantial VAT liabilities may be able to access loans of £1 million or more. Enness can assist with VAT finance requirements from £50,000 upwards.

In principle, many VAT-registered businesses can explore this type of funding. However, lenders tend to operate in specific parts of the market. Some focus on smaller facilities for SMEs, while others work with larger companies and arrange a smaller number of more substantial transactions each year.

How Do VAT Loans Work?

The mechanics of a VAT loan are relatively straightforward. A lender may settle the VAT liability directly with HMRC on behalf of the business. The business then repays the loan, usually through monthly instalments. In some circumstances, it may be possible to settle the facility in full when a VAT refund is received, subject to the agreed terms, fees and interest.

While VAT finance can be arranged quickly, the process of approaching lenders and negotiating terms can only begin once the necessary supporting documentation is available. Missing or incomplete information can delay the application, so preparation is important.

To help secure the most suitable terms, businesses may need to provide:

• A clear explanation of why the finance is required, whether to improve cash flow, manage an unexpectedly large VAT liability or retain liquidity for other business purposes.
• Proof that the business is registered for VAT with HMRC, such as an up-to-date VAT registration certificate.
• Confirmation of the amount of the VAT liability.
• Financial information supporting the overall position of the business, which may include profit and loss accounts, balance sheets and projected cash flow.
• In some cases, tax returns or historic financial information to help lenders assess the business’s trading performance and suitability for borrowing.

VAT loans are available from a range of lenders. Banks may provide facilities for larger borrowing requirements, while alternative lenders can also offer VAT finance for smaller liabilities and businesses with different funding needs.

The interest rate and terms available will depend on several factors, including the lender, the amount being borrowed and the overall financial position of the business. A business with strong liquidity and a clear reason for using VAT finance may be assessed differently from one seeking funding because it does not have sufficient capital available to meet its VAT obligation.

Contact Enness

If your business is looking to spread the cost of a VAT liability while preserving working capital, Enness can help explore suitable VAT finance options. Speak to our team to discuss your funding requirements and how we may be able to assist.

Disclaimer

Corporate financing and lender introductions are unregulated.