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Everything You Need To Know About VAT Bridging Finance

In this article, Adsum’s VAT specialists will break down the VAT Bridge method of financing — what it is, why it’s important and why it may or may not be the right kind of financing for you.

Why VAT Bridging Loans are popular?

VAT bridging loans have become increasingly popular because they solve one main problem that businesses face, a lack of working capital.

Businesses need working capital to cover any unexpected expenses and short-term financial obligations. If a business’ cash flow is tight, they need business loans to ensure continued business growth. Unfortunately, traditional, long-term financing requires security, and the application process is lengthy (for example, loans may take up to six months before they’re even approved and it may take even longer for releasing funds).

And this is where bridging loans come in: if you need a quick solution to your financial problems, you can apply for a bridging loan. Most VAT loans use the VAT refund owed to you by HMRC as security.

Here’s a few ways VAT bridging finance can be used:

1. Providing short-term working capital

Seasonal changes in demand are a common reality for many businesses and to this end, they may face a temporary crunch in cash flow. If you cannot find sufficient funds to deal with recurring expenses, your business can be in serious danger. Luckily, you can use VAT bridging finance to cover operational costs during the low revenue periods. Additionally, you can use the loan to meet your payroll obligations and ensure your staff are happy and productive regardless of what your revenue looks like in those months. If in case you need to take on new work, you can use the loan to cover the cost of employing new staff.

2. Financing the funding gap of commercial property purchase

When purchasing a commercial property that has been opted to tax with HMRC, then usually an additional 20% must be paid as VAT upon completion. In most cases in our experience, this extra 20% can cause serious problems in the form of a funding gap for buyers, as most traditional lenders will only lend 70% of the purchase price, and not take into account the VAT requirement. In this scenario, the funding gap is actually 50% which is required to secure the property. Adsum’s bridging loans are specifically designed to solve this funding gap, and enable our clients to secure the commercial property or land they need quickly and efficiently.

3. Renovation or expansion of business premises

Whether you want to renovate your commercial property to add value or expand the space to refine your production process, VAT bridging finance can help finance this. Often, renovation or expansion projects do not qualify for a conventional loan, however, this does not mean you should pass an opportunity to modernise your facilities or improve their value due to financial constraints. By applying for VAT bridge loan, you can start remodelling now. This also allows you to refinance the property at a higher value after renovation and pay back the loan or sell it for a profit.

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