What Is VAT Loan Funding? 

If you’re a UK-based business with a total taxable turnover of more than £90,000 in the past 12 mon

Updated: July 11, 2024
Rachel Wait

Written By

Rachel Wait

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If you’re a UK-based business with a total taxable turnover of more than £90,000 in the past 12 months, you’ll need to be VAT registered. The same applies if you expect your turnover to exceed £90,000 in the next 30 days. This VAT threshold has increased from the previous £85,000.

Once registered, your business must submit a VAT return every three months and pay its VAT bill.

However, paying this bill can be a headache for businesses, especially when cash flow is tight. This is why many choose to turn to VAT loan funding to see them through.

What is VAT?

Value Added Tax (VAT) is a tax charged on some goods and services sold by businesses over a certain size. The standard rate of VAT is 20%, but a reduced rate of 5% applies to certain goods and services, such as gas and electricity used in the home.

Some items, including most foods and children’s clothes, are zero-rated which means VAT is charged at 0%. Others, including insurance and health services, are exempt, so they don’t come with any VAT.

VAT-registered businesses must charge this tax to their customers and pay the tax collected to HMRC. But they can also claim back any VAT they’ve paid as an expense.

This means that when you submit your VAT return, you’ll need to pay any difference between the VAT you’ve charged your customers and the amount you’ve paid. Alternatively, if you’ve paid more in VAT than you’ve charged your customers, you will be able to claim back the difference from HMRC.

Also Read: 4 Benefits of Being VAT Registered in 2024

What are VAT loans?

VAT loans are a type of short-term business loan designed to help you spread the cost of your VAT bill. They are typically offered by specialist lenders.

When you apply for a VAT loan, the lender will pay the amount borrowed directly to HMRC to pay off your VAT bill. You then repay this amount in fixed monthly instalments. This can be over a term of three, six, nine or 12 months.

VAT loans are usually secured, which means you’ll need to use an asset, such as property, as security. If you can’t repay your loan, your asset is at risk.

Some VAT loans might also require a personal guarantee, whereby you agree to become personally responsible for repaying the loan if your business is unable to. However, this has its own risks and should always be considered with care.

Why might my business need a VAT loan?

If your business is having cash flow problems, it can be a struggle to find the funds you need to cover your VAT bill. Taking out a VAT loan can provide some much-needed breathing space.

The same applies if you’ve had unexpected expenses to deal with or you’re saving for a significant investment, meaning you don’t have sufficient funds to cover your bill. You might also need to take out a VAT loan if your business has seasonal demand and you need extra financial support when business is quiet.

If you fail to pay your VAT bill on time, your business will be hit with hefty penalties. These can build up over time, causing bigger financial issues for your business. Taking out a VAT loan can prevent this from happening.

Before you enter into a VAT loan agreement, it’s sensible to seek financial advice to ensure it’s the right decision for your business.

How much can you borrow with a VAT loan?

Many VAT loans are for smaller amounts of around £2,000 to £10,000. But it’s possible to borrow up to £5 million, depending on the lender and your business’ affordability and credit history. The better your company’s creditworthiness, the more you are likely to be able to borrow.

How much interest do VAT loans charge?

As with any type of loan, interest rates can vary so it’s important to compare your options carefully. Short-term loans typically charge higher interest rates compared to long-term loans.

If your business has a good credit history, you could find rates as low as 3% or 4%, but often rates will be higher.

Pros and cons of VAT loans

Pros

  • Can help you avoid penalties for missing VAT deadlines
  • Enables you to spread your VAT tax bill over a number of months
  • Helps you maintain a steady cash flow
  • Quick and easy to arrange
  • Payment is made directly to HMRC

Cons

  • As they are short-term loans, interest rates can be higher
  • VAT loans are specifically designed to pay off VAT bills – they can’t be used for anything else
  • You’ll have a maximum of 12 months to repay your loan

Who is eligible for a VAT loan?

The exact eligibility criteria will vary depending on the lender. But generally, you’ll need to:

  • Be a VAT-registered business
  • Have an annual turnover of more than £90,000, excluding VAT
  • Be a UK-based business
  • Have been trading for at least a year

How to apply for a VAT loan

Many lenders won’t offer you a VAT loan if you already have overdue payments. This means you’ll need to make sure you apply before you miss any VAT payments.

It’s important to compare loans from a range of lenders to help you find the right deal. Look at factors such as:

  • The amount you can borrow
  • The interest rate
  • Any additional fees, such as arrangement or early repayment charges
  • The term of the loan
  • Eligibility criteria
  • How quickly you’ll receive your loan funds

Once you’ve found the right loan, you’ll usually be able to apply online. You’ll need to fill in an online application form and may be asked to provide the following documents and information:

  • Proof of ID for all business directors
  • Business statements and accounts to show whether you can afford the loan
  • Company details, including your company address and registration number.

What is a VAT bridging loan?

A VAT bridging loan is not the same as a VAT loan. VAT bridging loans can be used to help businesses cover the VAT cost when purchasing a commercial property. These costs can be high and occur late in the buying process. A VAT bridging loan can be used to cover the cost and ensure the sale goes through.

What are the alternatives to VAT loans?

If you’re not sure whether a VAT loan is right for your business, there are plenty of alternative funding options available, depending on what you need the money for. These include:

  • Business loans: These enable you to borrow a lump sum of cash that you then repay in fixed monthly instalments over several years. A business loan can be more suitable if you need to borrow a larger sum to cover your business expenses or buy new equipment.
  • Business credit cards: If you’re looking for a flexible way to borrow funds as and when you need to, a business credit card could be a good option. You’ll need to pay off at least the minimum amount each month, and interest will likely be charged on any remaining balance. Some business credit cards also offer cashback and rewards.
  • Angel investors: These are high-net-worth individuals who invest their own funds into small businesses. In return, they get a minority stake. Angel investors can also give you access to important contacts and offer valuable business support.
  • Asset finance: This enables your business to access equipment, machinery and vehicles without the need to pay for them upfront. The two most common types of asset finance are hire purchase and lease financing.
  • Government grants: With a grant, you’re awarded an amount of money to help your business grow. But, unlike business loans, you don’t need to repay the money. However, you will need to meet strict qualifying criteria.
  • Crowdfunding: This helps you to raise funds for your business from a variety of investors. You’ll need to list your business on an online platform and investors and members of the public can then buy shares in your company.

Our verdict

VAT loans can be a great way to help your business spread the cost of your VAT bill each quarter and avoid penalty fees. Doing so can give your business some much-needed breathing space, helping you maintain cash flow or invest the money elsewhere.

However, it’s important to ensure you can repay your VAT loan on time, and that it’s affordable, before applying. Interest rates can be high, so it’s worth speaking to an independent financial adviser before making a decision.

Frequently asked questions

How often can you get a VAT loan?

You can usually take out a VAT loan every three months to help cover your quarterly VAT bill. But your business will typically need to be in good standing.

Do you pay VAT on a loan?

No, you won’t need to pay VAT when you take out a business loan.

How long does it take to get a VAT loan?

It usually takes around 48 hours for your loan application to be reviewed. Once accepted, the money should be paid to HMRC within a few days.

Can you use a VAT loan to pay other types of business tax?
No, a VAT loan can only be used to pay off your outstanding VAT bill. There are other loan options available for those who need help paying other types of tax.

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