Cash flow is a critical element of running a business. So it’s not surprising that small business owners in the UK often turn to private lenders to finance VAT payments. They have discovered that a good VAT loan can help them better manage their cash flow without being late with the taxman. That’s all well and good, but not every VAT finance offer is a good one. Business owners need to shop around.
We compare everything from mortgages to car insurance. So why is it the business owners do not apply the same due diligence in their search for VAT loans? Perhaps it’s because they tend to wait until they’re in trouble before they start looking for a solution. By that time, they are in panic mode and unable to take a good, hard look at as many loans as possible.
If you are a business owner, not shopping around for VAT financing is just bad business. Here are three reasons you should be shopping and comparing offers, just as if you were taking out a mortgage:
1. Interest Rates Vary Widely
There are plenty of specialist lenders more than happy to provide business owners with VAT financing. That’s not a question. But like any other kind of borrowing, taking out a loan to pay VAT is going to cost the business owner something. Most of the cost of borrowing is wrapped up in interest. And the fact is that interest rates vary widely among lenders.
If all other things were equal, it would not make sense to take a loan with a higher interest rate. The sensible thing to do is to get the lowest rate possible. The thing is, a business owner cannot know if he or she is getting the best rate if he/she doesn’t compare multiple offers.
2. Terms and Conditions Vary
Like retail loans, loans intended for VAT finance come with a variety of terms and conditions. Those terms and conditions can have a significant impact on a business’s cash flow. Remember that the whole point of VAT finance is to better manage cash flow while still paying the tax bill on time. It would be foolish to accept a loan offer based on terms and conditions that do not match cash flow needs.
One business might be best served by a loan that allows manageable monthly installments over the course of a full year. Another business might be better off with a shorter loan that can be paid in full before the next VAT return is due. Different needs indicate different terms and conditions.
3. Repayment Amounts Have to Be Considered
Lastly, both interest rates and loan terms affect repayment amounts. Payments have to be factored in when considering all of the business’s regular expenses. Just like it is foolish to take out a car loan that will not fit into your personal budget, it’s equally foolish to accept a VAT loan offer that doesn’t fit into your company’s budget.
If You Need a VAT Loan
The wisest course of action is to seek out loan offers that present you with the best possible deal overall. No VAT loan is perfect, so you have to set your priorities and then work with them. Your overall goal is to be able to pay your tax bill without significantly impacting cash flow. If you can do that while still managing to achieve the lowest possible cost of borrowing, you’ve done well.
Once your loan is paid off, consider setting up a system whereby all of the money you collect in VAT is automatically set aside in a separate account. That way, you have the money to pay the taxman when he comes knocking. Remember this: you are not paying VAT directly. You are collecting it from customers and passing it on to the government.
