Tax payments are a necessary part of running any business, big or small. For small business owners with limited staff and resources, keeping up with taxes can be tough. With various direct and indirect taxes to manage, they often face cash flow problems, penalties for not complying, and a lot of stress. Thankfully, small business tax financing can help them make timely tax payments without straining their working capital.

Types of Taxes for Small Businesses

Small ventures attract both direct and indirect tax liabilities. The key types include:

Direct Taxes

Direct taxes are levies imposed directly on taxpayers and paid to the imposing entity, usually the government. Small businesses' key direct tax obligations include income tax and corporate tax.

• Income Tax: All business entities, regardless of size and structure, must pay income tax every financial year. The rates vary based on turnover slab and legal status, business structure, entity type, etc. Income tax payments can impose a significant burden on cash flows.
• Corporate Tax: Private limited organisations and LLPs must compulsorily pay corporate tax on net profits earned. Newly incorporated enterprises enjoy relaxation in the initial years.

Indirect Taxes

Indirect taxes are levied on the production and sale of goods and services, which can impact the cost to consumer. For small businesses, the key indirect tax applicable is the Goods and Services Tax (GST).

• GST: Since its adoption in 2017, GST has replaced several indirect taxes levied earlier. If turnover exceeds the prescribed threshold, all suppliers of goods and services must register under GST. GST slab rates vary from 0% to 28% depending on the goods sold or services rendered. Making timely GST payments and mandatory filings can be challenging for resource-constrained small enterprises.

Common Challenges Faced by Small Businesses

On the tax compliance front, small enterprises often encounter the following pain points:

• Cash Flow Issues: Direct tax payments like quarterly advance tax and annual income tax impose sizeable cash outflows. Indirect taxes like GST also warrant monthly or quarterly payments. Newly launched ventures struggle to juggle working capital needs and significant tax obligations. Many end up defaulting on statutory payments.
• Lack of Awareness: Complex direct and indirect tax regulations with regular amendments make business owners need to stay updated to avoid overpayment or underpayment. However, most small business owners lack specialised tax knowledge. Due to their lack of awareness, they miss out on deductions, exemptions, and rebates at times.
• Mismanagement and Penalties: In addition to sheer lack of funds, small businesses also default on tax payments due to mismanagement and lack of planning. Errors in tax return filing can also attract penalties and interest. Such fines and charges impose a huge financial burden, in addition to legal hassles.

Benefits of Using Small Business Tax Finance

Against this backdrop, small enterprises stand to gain substantially by availing small business tax finance solutions. The key advantages include:

1. Enables timely payment of tax dues: This is the prime advantage, as small business tax finance offers funds specifically for meeting tax liabilities on or before the due date. Small businesses can thus continue normal operations without disruption.
2. Competitive interest rates: Compared to unsecured business loans, small business tax financing has relatively affordable interest costs, starting at just 15%* p.a. Repayment tenures are also flexible.
3. Supports regularisation of advance tax payments: Small enterprises can regularise obligations through tax financing instead of defaulting on advance or quarterly tax instalments and then making a lump sum payment. This brings discipline.
4. Reduces stress: Availing external capital for tax payments helps small business owners concentrate on business expansion rather than constantly worrying about meeting tax obligations.

How Small Business Tax Finance Works

Current and aspiring entrepreneurs seeking assistance on the tax payment front can avail themselves of financing from banks and non-banking financial companies (NBFCs) specialised fintech lending firms. The loan application and approval process involves clear steps such as:

• Registration: Interested applicants must first complete a basic registration process by visiting the financial institution's website. This requires sharing essential contact details.
• OTP Verification: Next, applicants must validate their registered mobile number through a one-time password sent via SMS.
• Information Submission: Applicants then submit relevant documents such as identity proof, income statements, address proof and business documentation, depending on the lending institution's criteria.
• Representative Call: Eligible applicants receive a call from the loan provider's representative to discuss personalised loan details, terms and conditions. The executive also guides first-time applicants through the process.
• Disbursal: Once the loan application is approved after verification, the loan provider disburses the approved loan amount directly to the applicant's bank account. Borrowers can then seamlessly pay outstanding tax dues.

Eligibility Criteria for Small Business Tax Finance

• To apply for tax financing facilities, applicants generally need to meet certain criteria, which may vary depending on the lender. Common requirements include:
• The business should ideally have been operational for at least 3 years from the date of incorporation.
• Individual applicants are typically expected to be between the ages of 18 and 60 at the time of application.
• Applicants must provide necessary documents such as identity proof, address proof, PAN card (or Form 60 if applicable), supporting documents for business ownership, and recent income tax returns or financial statements.
• While industries such as commercial vehicle ownership, transport/logistics, and travel agencies are often eligible, other businesses may also qualify depending on specific lending institution’s criteria.

Tips for Effective Tax Planning

While availing funds duly enables timely tax compliance for small enterprises, business owners must also implement prudent practices within their enterprises to better plan and manage tax payments:

• Maintain Updated Financial Statements: Keeping regular books of accounts may help ascertain tax liabilities accurately and well in advance. It also enables claiming optimal deductions.
• Understand Tax Rules and Updates: Spend time enhancing awareness about the latest tax slabs, available exemptions, procedures for return filing, etc. relevant to one’s business. Seek professional guidance if required.
• Use Tax-Saving Avenues: Explore and invest in tax-saving instruments to reduce income tax outgo. The tax savings can provide funds for other business needs.
• Remain Compliant: Avoid defaults in tax return filing and payments due to sheer ignorance or oversight. This saves interest and penalties while also keeping legal hassles at bay.
• Make Quarterly Provisions: Estimate the yearly tax liability and make provisions through quarterly advance tax payments. Last-minute arrangements for a lump sum payment create an avoidable cash crunch.

Conclusion

Managing frequent tax obligations and business expansion priorities can be challenging for small business owners with limited bandwidth. In the absence of sufficient reserves or working capital financing, timely payment of taxes takes a backseat, thereby attracting penalties. Availing small business tax finance is a prudent way to remain compliant with tax mandates without straining daily operations or growth plans. Specialised entrepreneurial tax solutions help lay the foundation for small businesses to embark on a high growth trajectory compliantly.

FAQs

1. Are there any prepayment penalties for tax financing loans?

Most tax financing providers do not levy prepayment penalties on their loans. Applicants can generally foreclose the loans earlier than the tenor without any extra charges. However, do check with your loan provider on applicable prepayment terms for your loan.

2. How can I make my loan payments for tax financing?

You can pay your tax financing loan through multiple modes - cheques, demand drafts, online transfers etc. Most financing providers provide an online applicant portal allowing you to seamlessly pay your equated monthly installments (EMIs).

3. Can I refinance an existing loan for previously financed taxes?

If you had taken a loan earlier to meet any tax liabilities, you can certainly refinance that loan to benefit from better terms, if available.

4. Can I use Tax Finance for paying overdue tax liabilities?

Yes, small business tax finance can be used to clear overdue tax payments, including past-due GST, advance tax, or road tax. However, eligibility may depend on the lender’s policies regarding financing overdue liabilities.

5. Is collateral required to make tax finance available?

Most tax finance solutions are unsecured, meaning no collateral is required. However, some lending institutions may offer secured options backed by fixed deposits or other assets for better interest rates.