What is a VAT Loan?
A VAT loan (Value Added Tax) is a relatively niche corporate finance product that is becoming more mainstream as businesses use it to manage their VAT obligations and cash flow more effectively.
A VAT loan helps businesses bridge the gap between the requirement to pay VAT to HM Revenue and Customs (HMRC) and the settlement of VAT. The loan is then repaid in regular installments over the loan term.
At a Glance: Key Benefits Of VAT Finance
- VAT loans can facilitate cash flow because working capital that would otherwise be used to pay a VAT liability stays within the business.
- Enness can arrange these loans within a week – even for large VAT liabilities. This is helpful if you are facing late payment penalties, or want to use the capital set aside to settle your VAT liability for other investments or projects.
- These loans are competitive in price, with interest rates usually more competitive than traditional corporate finance products. In some cases, this means it can be beneficial to use VAT finance instead of raising capital via another type of loan.
- VAT funding can be especially useful if you experience seasonal fluctuations in revenue and don’t have as much capital available within your business at certain times of the year.
- VAT loans are available year-round, and can be used by businesses that pay VAT liabilities monthly or quarterly, or if you have a large, one-off VAT invoice to pay after the purchase of a commercial property, for example.
Eligibility
VAT finance is available for businesses of all sizes and there are relatively few restrictions on the y businesses that can borrow. You will be able to access VAT finance as long as you are VAT-registered in the UK and your business is in good financial standing, has a good credit history and solid income and cash flow projections that support borrowing.
VAT finance is available at almost any size as some lenders offer loans of just a few thousand pounds to cover a VAT obligation. Successful small and medium enterprises (SMEs) tend to require loans around the £50,000 mark, but it’s equally possible for larger businesses with more significant liabilities to access loans of £1 million or more. Enness can arrange VAT loans for any amount over £50,000.
In principle, all VAT-registered businesses can apply for a VAT loan. The lenders that offer this type of finance tend to operate in specific parts of the market – some players will offer SMEs smaller loans at larger volumes, and other lenders work with bigger companies, writing just a few, very significant loans each year.
How Do VAT Loans Work?
The mechanics of a VAT loan are relatively simple. Your lender will usually prefer to settle your VAT liability on your behalf directly with HMRC. Your business will usually repay the loan on a monthly basis, or, in some cases, you can opt to settle the loan in full – minus fees and interest – when HMRC refunds the VAT to you.
While we can arrange VAT finance very quickly – usually in less than a week – the process of approaching lenders and negotiating a deal can only start when you have all your supporting documents ready. Missing or incomplete documents will delay the process, so ensuring you’re ready to move forward is imperative.
To secure the best deal for you, you’ll need to be able to provide Enness with:
- A clear indication of why you want to access finance. This may be because you want to manage cash flow better, because your VAT liability is unexpectedly large or because you want to retain liquidity in your business. Lenders are open to various scenarios, provided you can show that the loan is affordable and your business is capable of paying it back with comfortable margins to do so
- Proof you are registered to pay VAT to HMRC – an up to date VAT registration certificate is usually sufficient
- The amount of your VAT liability
- Accounts which support the overall financial position of your company. These can include your P&L, balance sheet and projected cash flow, which will help lenders determine you can repay the loan (and is especially important if you are making monthly repayments)
- In some cases, you may need to provide tax returns which detail your business’ performance in past years, which will support lenders to assess your suitability for a loan
VAT loans are offered by various lenders. Banks can offer these loans for larger amounts, but alternative lenders also specialise in VAT financing for small liabilities and amounts up to around £100,000.
The interest rates and terms your business is offered will depend on your lender, how much you want to borrow and your financial position. For example, you may be able to get a better rate if your business is very liquid but is using this type of finance to facilitate cash flow, rather than because you haven’t accrued enough to cover your obligation.
Contact Enness
No matter how much you want to borrow, we can secure competitive VAT finance for your business. Contact us for a no-obligation chat to discuss what you need and how the team will be able to help you.
Disclaimer
Corporate financing and lender introductions are unregulated.
Islay Robinson, a founder of Enness, is widely regarded as one of the UK's leading mortgage brokers. He has been instrumental in delivering some of the most complex and high value mortgages in the UK.
