Often when a company contacts us about a VAT loan, it’s often a new product to them. This means we’re often asked ‘How does a VAT loan work?’. Our latest blog outlines in simple terms what a VAT loan is, how it works, and why companies use VAT loans.
What is a VAT loan?
A VAT loan is used by businesses to help fund the cost of the quarterly VAT tax bill. The loan is then paid back to the funder in 3 monthly payments. This helps disperse the cost of the tax into affordable amounts.
How does it work?
A VAT loan will be paid on your behalf directly to HMRC by the financier. This guarantees that all legal requirements of being VAT registered are met. Having those checks taken care of takes stress and responsibility out of your company’s hands.
Why do companies use VAT loans?
- At times when companies are struggling to pay the large lump sum of the quarterly tax bill, they turn to VAT loans. Should you have various other business expenses, a loan can provide relief. It can also allow your company to gain momentum again.
- A company might have a current project to complete that is generating increasing expenditures. Financing your VAT bill might free up enough capital to get that project finished. Subsequently, the margin created from that project will generate enough income to compensate the expenses of the loan.
- There are cases where a company’s capital is so critically low that it is crucial for a business to finance their VAT loan in order to survive and stabilise cash flow.
- Unexpected costs are also bound to arise in businesses. These include: broken equipment that needs replacing or fixing, purchasing new stock or hiring employees. These things happen and this is when a VAT loan could be necessary in supporting your business.
- Some businesses also struggle with seasonality at certain points of the year; therefore, they might require a VAT loan at tougher times when they are not receiving as much revenue as they do other periods of the year.
- A rather obvious reason as to why a company might take out a VAT loan; albeit a very important justification for a loan, would be to avoid tax penalties. Tax penalties can be extremely detrimental to a business already low in capital and can potentially put them out of business completely.