An overview of VAT lending

VAT lending is a type of business finance that allows a company to better manage its short-term cash flow. Essentially, it is a loan that covers the cost of a VAT bill. This can be particularly beneficial when a business has to pay a large amount of VAT to its suppliers before it can invoice or receive payment from its customers.

VAT lending works in three simple steps:

1. A business applies for a VAT loan from a specialist lender or financial institution.
2. An agreed loan amount is secured to cover the VAT charges on items such as goods, supplies, services, and large capital expenditures.
3. Repayments are made once the VAT is reclaimed from HMRC. The terms of repayment are aligned with the business’s monthly or quarterly tax filing schedule.

There are several benefits to VAT lending:

• Improved cash flow: VAT payments can be made immediately while maintaining a healthy cash flow to meet working capital and operational expense needs.
• Bridging cash flow gaps: Large VAT payments can create temporary cash flow gaps, especially when there is a delay in receiving payments from customers. VAT lending can bridge this gap.
• Flexibility: VAT loans are generally short-term and can be tailored to meet the specific needs of a business.
• No impact on credit lines: This type of lending is usually treated separately, so it won’t affect other credit lines. A business using VAT lending can still access other forms of financing without negative impacts.
• Focus on growth: By relieving cash flow issues related to VAT bills, a business can focus on growth and operational efficiency.

Who can benefit from VAT lending?

• SMEs: Small businesses often face significant cash flow challenges. VAT lending helps solve these problems.
• Seasonal businesses: Companies with seasonal revenue can use VAT lending to cover financial gaps during off-peak periods.
• Growing businesses: During expansion, significant costs are incurred. VAT lending helps manage these costs without draining cash reserves.

VAT lending can be an excellent business finance tool. However, as with any form of business finance, it is important for companies to recognize the associated costs, including interest rates and fees. This ensures they can establish a solid and affordable repayment plan.

Case Studies: The NGI Finance team recently facilitated VAT lending deals of £180K for an engineering company, £40K for a consultancy business, and £50K for a professional services organization.

For help with a VAT lending application or if you have any specific questions, feel free to reach out to our business finance team. You can call them on 01993 706403 or email enquiries@ngifinance.co.uk.