In any business venture, financing is one of the most critical driving forces behind its success or failure. As a business owner, you need to weigh up all the available options to decide what works best for your company. In this blog post, we’ll be exploring the pros and cons of VAT loans vs. traditional financing.
Pros of VAT Loans:
Pay HMRC on time
A VAT loan can let a company pay its VAT bill by the deadline and spread the cost over later months. The loan itself carries interest and may carry fees. Paying HMRC on time avoids HMRC late payment penalties and interest on that bill, so compare the loan’s total cost with the cost of paying late or using another option.
Security and guarantees vary
Some VAT loans are unsecured, but a lender may still ask for a personal guarantee from a director. Check the security and guarantee terms before accepting an offer.
Cons of VAT Loans:
Limited Purpose Loan
A significant disadvantage of a VAT loan is that it’s only designed to cover VAT bills. It’s not intended for other expenses such as business expansion, capital improvements or payroll. Nonetheless, for short-term solutions that require immediate cash, VAT loans are an excellent option.
Some Providers have Limitations
While VAT loans are an innovative form of lending for businesses, not all companies offer this service. The availability of VAT loans to your business depends on the provider and their conditions.
High Interest Rates
The cost of borrowing remains one of the significant challenges of VAT loans. Although rates vary depending on the lender and the borrower’s credit rating, they can be higher than with traditional financing. As a business owner, you must be prepared to pay a higher interest rate if you opt for this type of financing.
VAT loan or overdraft: which suits a VAT bill?
| Question | VAT loan | Business overdraft |
|---|---|---|
| How is it repaid? | Fixed instalments over an agreed term | Flexible; you borrow and repay within the limit |
| How is interest charged? | Set out in the loan agreement, with any fees | Usually on the amount overdrawn; check fees and the rate |
| Can the lender change it? | The terms are fixed for the agreement | Banks can often review, reduce or withdraw an overdraft |
| Does it use existing limits? | Separate facility | Uses headroom you might need for other costs |
An overdraft may suit a short, predictable gap if you have unused headroom and understand its cost. A VAT loan may suit a larger bill that you want to repay on a fixed schedule without using your overdraft limit. In either case, compare the total cost and check that the repayments fit your forecast. Use the VAT loan calculator to estimate repayments.
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While both VAT loans and traditional financing have their respective pros and cons, in the end, it all depends on a business’s specific situation, financial status and goals. It’s essential to consider carefully which form of financing is right for your endeavour. If you would like more information on the pros and cons of VAT loans vs. traditional financing then please contact us.