Wonga business loans – cause for concern?

Online loans business Wonga.com has launched a new lending division aimed at providing finance to businesses. The company, which is better known for offering short-term finance to individuals with interest rates quoted as 4,214%, has identified a gap in the market for business finance. Firms can borrow between £3,000 and £10,000 for up to one year, with interest rates understood to be in the region of 17%, although the actual rate offered depends upon the risk profile of the business making the application. The website makes clear that the business owners will be asked to give a personal guarantee, together with details of a debit card from which payments can be taken if the business misses more than two repayments.

Founder and CEO of Wonga.com, Errol Damelin, said, “We believe business lending is broken, so we’re proud to launch a new alternative that’s speedy, flexible and available 24/7.”

However, the move has attracted some criticism, not least from R3, the leading insolvency trade association, which warned of the dangers of a short term fix being unable to deal with serious problems within a business.

Only time will tell whether the service is a genuine help to businesses or whether it encourages struggling businesses to become further over-indebted before going bust. Of course, there are all sorts of reasons why businesses may need to borrow, for example to fund a new opportunity or expansion, but the danger lies in business owners borrowing to pay off existing creditors, leading to a ‘snowball’ effect as interest rates and fees add to the debt burden.

It is vital to keep a close eye on the financial management of a business and to seek advice as soon as cash flow problems arise. Simply borrowing more money may seem like the answer, but often an injection of fresh cash will only delay the inevitable. If cash is available to a business, there may be better ways of using that money to turn the business around and deal with the root cause of the problems. This may be a re-launch of the business or the establishment of a new business, with a new strategy and a new lease of life.

Cash flow problems, short of cash, good underlying business but sinking under old debts? We can help. Call Paul Moorhead at Moorhead Savage today on 01709 331300. We can help.