Some companies in the UK are obligated to pay VAT bills, but the volume of quarterly expenses often disrupts cash flows, which often makes companies heavily rely on VAT loans. They are short-term financial loans designed to help companies pay their quarterly VAT bills in order to protect their businesses from cash flow problems. With the help of these loans, you can spread the cost over a duration of 12 months.

Why do businesses need VAT loans?

Your business needs to be VAT registered in order to pay value-added taxes.

• VAT tax is mandatory if your turnover exceeds £90,000. However, registration is optional if it is less than that.
• VAT is paid by businesses that charge value-added taxes on their products and services.
• Every quarter, you will have to inform HMRC of the VAT you have collected from your customers and what you have paid to your suppliers. The difference between the two amounts is what you pay as VAT.

However, it is likely that your business does not have enough time to pay the difference amount to the HMRC, and therefore, you will need a VAT loan. The reasons why your business might struggle to have sufficient cash to pay VAT bills include, but are not limited to:

• Your business is seasonal. Cash flow problems are quite obvious during the off-season.
• Your business has already made a big investment in growth and expansion.
• Unexpected expenses have blown your cash reserves.
• You are already struggling with cash flow issues temporarily.

Abdicating responsibility will result in severe consequences, including late payment charges and fees, as well as investigations for dodging taxes.

How do VAT loans work?

VAT loans can be applied for from direct lenders as well as banks, but bear in mind that these loans are subject to collateral.

• You can borrow between £5,000 and £5 million. The loan amount approval is subject to your business income and creditworthiness.  
• After the approval, the lender will pay money directly to the HMRC.
• You will be under an obligation to discharge the debt with interest in monthly instalments. Most of the time, the repayment agreement concludes within the 12-month timeframe.

The application procedure for VAT loans is simplified. It is necessary to meet the established acceptance criteria.

• First off, your business must have been trading for at least one year.
• A lender will peruse your personal credit report and business credit rating. They both must be good.
• You will need to submit some documents such as a bank statement of the previous six months, an income and expenditure statement and a statement of accounts.
• In addition, it is mandatory to provide evidence of your repayment ability.

Ways to secure a VAT loan

Here is how you can secure a VAT loan:

• The first step is to determine the VAT liability. Calculate how much VAT you have charged your customers and how much you have paid on bought goods and raw materials. Determine the difference, which is your VAT tax.
• Now that you know how much you are to pay to the HMRC, you should check if your business has enough cash to pay it. Sometimes, you might have to avoid dipping into working capital or earmarked cash because of big investments on the horizon.
• Research direct lenders, banks and specialised VAT loan companies and compare their interest rates. This is essential because it will help you choose the most competitive loan deal.
• As you will have to submit financial documents, get them ready, so the approval process does not take longer.
• Submit applications before the deadline to avoid delays. Bear in mind that lenders can also take two or three days to complete the process.
• As soon as funds are approved, the lender will pay funds directly to the HMRC, and you will start making payments to your lender.

Advantages of VAT loans

Here are the benefits of VAT loans:

• First off, you can receive quick access to cash. Most of the time, VAT loan applications are approved within two working days.
• The cost of VAT bills is spread over months, which means your cash reserves will not drain.
• Your company’s financial progress is not harmed when you make payments on time.

Alternatives if you fail to secure a VAT loan

It is likely that you will fail to have your VAT loan application approved by your direct lender. Here are the alternatives to VAT loans:

• Fast small business loans

Fast small business loans can help you meet all kinds of business expenses. These loans are unsecured in nature, but they charge high interest rates. The good thing is that there is no risk of losing collateral.

At the time of taking out small business loans, you should carefully ensure that you will not struggle with payments.

• Secured business loans

Unsecured small business loans might not be able to furnish you with enough funds. Here comes the role of secured business loans. Not only will they let you borrow a large amount of money, but they will also charge lower interest rates in relation to unsecured business loans.

The final word

Qualifying for VAT loans for your business is not complicated as long as you meet the eligibility criteria. However, you should still carefully scrutinise your repayment capacity. If somehow you fail to secure a VAT loan, you can consider unsecured business loans and secured business loans, depending on the loan amount you need.

When you have the capability of withdrawing cash from your reserves, and you can still manage your business operations, it is advised that you should be your preferred choice. If funds are not sufficient, consider VAT loans only to bridge the gap. This will help you avoid bearing unnecessary financial burden down the line.