VAT finance for professional services firms

How cash moves in professional services

Work in progress and client payment terms mean fees invoiced in one quarter may not be received until the next.

Why VAT can put pressure on working capital

Quarterly VAT is calculated on fees invoiced, not fees received, so the liability can arrive before the related cash.

Where partner or director drawings are also taken from the same cash, a VAT payment can tighten the position further.

An illustrative example

A consultancy has a £36,000 VAT payment due. Two large client invoices are outstanding and expected next month.

Financing £20,000 could bridge the gap until those fees are collected. Figures are illustrative and finance involves an additional cost.

How VAT finance may work

The business applies for finance for all or part of the VAT liability. If approved, the funds are used towards the VAT payment and the business repays the finance provider over the agreed term.

Things to consider

• Whether the VAT cash accounting scheme would better suit the business
• The reliability of client payment terms
• Monthly payroll and planned drawings
• Whether the pressure is a one-off or recurs every quarter

Eligibility depends on the business and the finance provider, not on its sector alone.