Are you planning to purchase commercial property? Perhaps you’ve already committed to buying one, and have just found out that you’ll need to pay VAT on it? A VAT bridge can be an easy way to avoid the difficulties of a big bill, but it’s important that you understand how they work before committing to one.
Why might I need a VAT bridging loan?
When purchasing some commercial property you might be faced with a 20% VAT bill. This might take you by surprise, since most property purchases don’t attract such a fee. However, when the property has been renovated or is fewer than 3 years old, you might need to factor VAT costs into the purchase price. If you VAT-registered you should be able to reclaim the VAT. However, this can take several months, and in the meantime you’ll be left with a bill for tens of thousands of pounds.
How does a VAT bridge help?
If you’re purchasing a £500,000 property and get hit with a 20% VAT bill, you need to come up with £100,000 in order to complete the purchase. Few businesses are in a position to do so, but specialised VAT bridging lenders will step in to loan you the money you need. This lets you meet your short-term obligations and proceed with the purchase. Even if a VAT bill has taken you by surprise, a bridging loan can usually be put in place in less than a week.
How does a VAT bridging loan work?
There are two core principles to any bridging loan. These are the security and the exit strategy. In most cases, a VAT loan will be secured against the rebate you’re pursuing from HMRC. However, in some situations, a lender might decide they need greater security. This might lead them to take out a first or second charge on your assets, allowing them to reclaim their money by selling them if necessary.
The exit strategy is the way in which you intend to repay your bridging loan. This will be by obtaining a rebate from HMRC if you are able to do so. Otherwise, you might choose to remortgage property or obtain an alternative source of finance. VAT bridging lenders will carefully examine the strength of your exit strategy, because if it fails you’ll be unable to repay their loan.
What is a managed VAT loan?
VAT bridging lenders are a specialised group within the financial sector, and have a lot of experience in dealing with reclaiming VAT on commercial property purchases. They’re good at getting money back quickly, and in many cases will offer to take care of it for you. This usually means paying additional fees, but it can be a good way to get your money back quickly. The faster the money is repaid the less you’ll pay in interest, which could potentially make this a way to save money overall. Of course it is worth exploring whether an independent VAT reclamation specialist might be able to do the same job for a lower price.
How much interest will I have to pay?
The primary cost of taking out a VAT bridge is the interest you pay. This varies significantly depending on who you’re borrowing from and how much they’re lending you. Interest is usually assessed on a monthly basis, since bridging loans are only intended to last for a short period of time. You’ll often have the option of deferring or “rolling up” the interest on your loan. This means you won’t pay any interest until the end of the loan. This relieves pressure on your cash flow while the loan is in place, but you will need to pay off all the interest at once at the end of the loan.
What other fees will I have to pay?
Interest isn’t the only cost associated with a VAT bridging loan. In addition to this, you’ll also have to pay arrangement fees, accountancy fees and legal costs. Some lenders will factor “exit fees” in as well, which incurs additional costs when you repay the loan. It’s worth having a finance specialist to consult with before committing to any bridging loan, just to be sure you know what you’ll be expected to pay for.
VAT bridging finance - is it right for me?
A VAT bridge is a very straightforward way to meet a difficult challenge. If your business can’t meet the VAT bill any other way, then a VAT bridging loan is an excellent tool to use. Just be aware of what the costs are, and make sure you won’t struggle to repay on time.
Vat Bridging Lenders
5 Key lenders in this area include (click the link to learn more about them)
If you are buying a commercial property and need some independent advice - the experts at bridging dot com are happy to chat through the options for you including best lenders for financing your purchase along with Vat Bridging options