VAT loans: everything you need to know

Paying VAT bills can quickly eat into a small business’s funds and disrupt operations. The good news is that VAT loans let you spread the cost, helping keep cash flow steady while you meet your tax obligations. Here’s how they work and how to get one. 

Key takeaways

• VAT loans help you cover VAT bills by spreading the cost over time

• Eligibility depends on your business's turnover, credit history and assets

• You should compare lenders to find the best interest rates, terms and fees

What is VAT?

Value Added Tax (VAT) is a sales tax that VAT-registered businesses charge on many goods and services they provide. It applies to:

• Products for sale

• Services (anything other than supplying goods)

• Hiring or loaning goods

• Selling business assets

• Commission fees

• Business goods used for personal purposes

• Non-sales, such as gifts

You must register for VAT if your business’s taxable turnover exceeds £90,000. If it's below this threshold, registration is optional. As a VAT-registered business, you need to submit a VAT return to HMRC every three months, even if you have no VAT to pay. Typically, you must submit your return and pay any VAT due within one month and seven days of your three-month accounting period ending. 

It’s helpful to discuss your circumstances with a financial advisor or accountant before registering for VAT. Also, review available VAT schemes, as they affect how you calculate and report Value Added Tax to HMRC.

💡 VAT loans: the overlooked finance option helping SMEs manage cash flow

What is a VAT loan?

A VAT loan is a form of business finance. It provides short-term funding that lets you pay your VAT bill on time while spreading the cost. VAT payments are a regular business expense, often due every three months.

Larger businesses may manage this easily, but small businesses with tight cash flow can struggle to cover it every quarter, especially after an unexpected expense or new equipment purchase. A VAT loan can help. Here’s how it works: 

1. Find a lender

Banks and independent lenders offer VAT loans. They are typically secured loans, meaning you must provide an asset as collateral.

2. Determine how much you need to borrow

Depending on your business’s financial history, credit score and borrowing needs, you can borrow anywhere from a few thousand pounds to several million.

3. Loan approval

If a lender approves the loan, it pays the funds directly to HMRC to cover your outstanding VAT bill.

4. Repay the loan

Your loan agreement outlines your repayment terms, but you typically need to make monthly repayments over three, six, nine or twelve months. These installments pay off the borrowed sum plus interest.

Is my business eligible for a VAT loan?

Eligibility for a VAT loan varies by lender and depends on personal and business criteria. Most lenders require you to be:

• Aged 18 or over

• The owner of a UK-registered business

• A UK resident

And your business must:

• Have been trading for at least one year

• Have a turnover of £90,000 or more

To verify your business’s finances, provide evidence such as cash flow projections, bank statements and balance sheets. You also need to provide ID, like a passport and proof of address. Lenders check your credit score for eligibility, too. If your business has no borrowing history, the lender may check your personal score instead. 

Things to look out for when applying for a VAT loan

VAT loans are straightforward, but you should consider a few things before applying:

Interest rates

VAT loan interest rates are usually higher than other types of business funding, but deals are still available. Compare different lenders to find a rate that suits you.

Terms

Ensure the loan terms meet your needs. How long do you have to repay? What is the monthly repayment amount? Answering these questions helps you assess the loan’s impact on cash flow.

Fees

Some lenders may charge additional fees, such as a setup fee. Check with lenders beforehand to avoid unpleasant surprises.

The pros and cons of a VAT loan

A VAT loan has both pros and cons. Weigh them before applying to ensure it's the right decision for your business. 

Pros

Improve cash flow - A VAT loan lets you spread the cost of your VAT bill, which can improve cash flow

Speedy approval - If your business meets the criteria, lenders often approve VAT loans quickly, providing timely support

No impact on operations – The loan covers your tax obligations and prevents disruptions to daily operations 

Cons

Interest and fees - VAT loans carry higher interest rates and fees than other types of business finance, increasing the total cost compared to paying the VAT bill upfront 

Collateral required - Most VAT loans are secured (a type of loan where you offer assets as collateral). This can be risky if you fail to repay the amount borrowed, as you could lose the assets

Short-term fixed payments - VAT loans are short-term, requiring full repayment with interest within a limited timeframe. Unexpected challenges – like delayed client payments – can strain finances during the repayment period.

For greater flexibility and longer repayment terms consider alternatives such as invoice finance or asset finance.