If your business is registered for Value Added Tax (VAT), which it must be if your VAT taxable turnover has exceeded £85,000 in the past 12 months, you’ll need to charge VAT on all your goods and services.
You can also reclaim VAT on any goods and services your business buys. You’ll then need to pay the difference between these 2 figures to HMRC once a quarter.
However, paying this VAT bill every 3 months can be stressful for many businesses and place a strain on their cash flow. This is where VAT loans come in.
What are VAT loans?
VAT loans are a type of financial product that can help businesses manage their VAT obligations. These short term loans can help businesses pay their VAT bills on time while also helping them to optimise their cash flow.
How do VAT loans work?
VAT loans are designed to help businesses spread the cost of their VAT bill over a set period rather than paying it in one go.
You can apply for a VAT loan from a bank or online lender, and if your application is successful, the lender pays the amount borrowed directly to HMRC. The business then repays the lender in monthly instalments, with interest charged on top. Loan terms are typically between 3 and 12 months.
Many VAT loans are unsecured, but secured VAT loans are also available. With a secured loan, you’ll need to use an asset as security. If you take out a secured VAT loan, your assets could be at risk if you don’t repay.
How much can I borrow with a VAT loan?
The amount you can borrow with a VAT loan ranges from £5,000 to £5 million, but this depends on your business’ circumstances and eligibility. Having a good business credit score and a solid trading history usually means you can borrow a larger sum.
Secured VAT loans also tend to offer higher borrowing amounts than unsecured.
What are the interest rates?
Interest rates on VAT loans vary depending on the provider, as well as your business’ credit history and financial circumstances. Interest rates can be higher than other forms of business loans as they are over a shorter term. However, rates can be as low as 2.9% to 5.5%.
Who provides VAT loans?
Several online lenders offer VAT loans. As with any financial product, it’s best to shop around and compare a number of lenders, considering factors such as the interest rates available, the loan terms and any fees that apply. Also, check the eligibility criteria and how quickly the funds will be paid out – this is often within 24 to 48 hours after you’ve been approved.
Reasons to apply for a VAT loan
One of the biggest reasons to apply for a VAT loan is that it can help pay your VAT bill without putting a strain on your business cash flow. Taking out a VAT loan can help you to effectively manage your working capital requirements, and it eliminates the risk of late payment penalties that could apply if you fail to pay your VAT bill on time.
Benefits and limitations
Benefits
VAT loans are paid directly to HMRC, so you won’t be hit with late payment charges.
Rather than paying a lump sum each quarter, VAT loans enable you to spread the cost of your VAT bill in monthly instalments.
Can help you to optimise your cash flow and use the funds that would otherwise have been tied up to invest in other areas of your business.
Limitations
Because VAT loans are short term loans, they can be more costly.
Some VAT loans are secured, which means you’ll need to use an asset as collateral.
Repayment terms are short.
Eligibility criteria
Exact eligibility criteria will depend on the lender, but in general, you will need to:
Be a UK-based business
Be VAT registered
Have an annual turnover of more than £85,000 (excluding VAT)
Be trading for at least a year
Have a good credit history
How do you apply for a VAT loan?
You can usually apply for a VAT loan online by filling in an application form. You’ll usually need to provide certain documents, such as proof of identity and your business’s address, as well as bank statements and financial statements to help show you can repay the loan.
Many lenders review your application within 48 hours, and if approved, the money can be paid to HMRC within 24 to 48 hours.
What are VAT bridging loans?
A VAT bridging loan is a short term loan used to pay VAT on commercial property purchases. VAT tax liabilities can unexpectedly arise during the later stages of a transaction, and these can be costly. A VAT bridging loan helps to cover the tax payment and ensure the sale completes.
Alternative financing
As well as VAT loans, you could explore other financing options. These include:
Merchant cash advance
A merchant cash advance can be a good option for businesses that accept debit and credit card payments. Funds can be accessed quickly and are then repaid through a percentage of future card sales. This means you don’t need to make monthly loan repayments, which can be useful if you have fluctuating income.
Invoice finance can suit businesses with high-value invoices. Rather than waiting for them to be paid, a third party advances you up to 95% of the invoice value upfront. The third party collects the funds from the client when they are due, and the remaining balance, minus fees, is paid to you.
A business credit card is a flexible way to borrow the funds you need. You can borrow up to your set credit limit as and when needed and then repay the amount borrowed in flexible monthly instalments. If you don’t clear your balance each month, interest is usually charged.
VAT loans can be a useful way for businesses to spread the cost of their quarterly VAT bill. Rather than having to find the funds upfront, payments can be spread over a number of months. This can help ensure no deadlines are missed and free up cash to use elsewhere in the business. However, as these are short term loans, keep in mind that interest rates can be high.
Frequently asked questions
No, you don’t have to pay VAT on a business loan. Interest on business loans is not subject to tax.
Yes, as long as you are VAT registered and you meet the lender’s eligibility criteria, you can apply for a VAT loan.
There is no one best VAT loan. Different lenders offer different interest rates and terms for their VAT loans, so you’ll need to shop around and compare to decide which works best for you and your business.
VAT loans can often be taken on a rolling basis every quarter, as VAT is paid every 3 months.
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Rachel Wait is a freelance journalist and has been writing about personal finance for more than a decade, covering everything from insurance to mortgages. She has written for a range of personal finance websites and national newspapers, including The Observer, The Mail on Sunday, The Sun and the Evening Standard. Rachel is a keen baker in her spare time. See full bio
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