Small businesses registered as a limited company usually have many daily, weekly and monthly expenditures that they can often be late to settle their Value Added Tax (VAT) Bill. The biggest problem with late VAT payments is that they attract tax penalties, which can significantly impact a business’ available working capital. Not only that, interest is charged daily on the overdue bill until it is paid, meaning it needs to be pad as soon as possible.
To avoid being late with VAT payments, it is up to the prudent owner to plan ahead on how they will source the funds to pay the bill if they don’t have enough working capital. Settling VAT arrears means you can get back to running a viable business, and VAT debt can be settled in the following three ways:
1. Invoice Factoring
Invoice factoring, also known as accounts receivable factoring, is one of the major forms of debt financing. With invoice factoring, your business sells its invoices to a third party to meet its immediate cash requirements, such as VAT debt. However, the invoices (called accounts receivable) are sold to the third party (called factor) at a discounted price.
People usually mistake invoice factoring from invoice financing. In the latter scenario, invoices are used as collateral for a business loan, while in the former, they are liquidated for immediate cash. When you sell your invoices, you no longer have to wait for customers to settle them; it is now the responsibility of the third party to collect the cash owed by customers.
2. Asset Refinancing
Many small businesses are sitting on a potential source of cash flow without realising it. They have specialised assets, such as equipment and machinery, that they can leverage for a much-needed cash influx to settle their VAT debt. Rather than let their unencumbered assets depreciate over some time, SMBs the world over a waking up to the reality of asset refinancing as a valuable method of securing working capital.
With asset refinance, you sell an existing and unencumbered high-value asset to a lending company for its current value. By doing so, you transfer ownership to the lender for a specified period. The lending company advances you the cash while simultaneously leasing the asset back to you for business use until you settle the agreement. Upon settlement, ownership of the asset is transferred back to you.
3. VAT Loan
If you want to know how to deal with your VAT debt without resulting to invoice factoring or asset refinancing, a VAT loan can be just what you need. This option works like any other unsecured small business loan, where you get short-term financing. The difference is that the loan is for the explicit payment of your tax bill, and the lender pays the funds directly to the HMRC on your behalf.
When a small business is saddled with many bills, it can make it extremely difficult to expand operations and become profitable. VAT debt is detrimental to the financial health of your enterprise, and late payments can only make the situation worse. Invoice factoring, asset refinancing and VAT loans are great options for staying current with your VAT payments.