Posted On: 9th August 2012
Payday Loan Company ‘Wonga’ are now making loans available to businesses.
Wonga are one of the leading companies in the payday loan market which is now estimated to be worth £1.7 billion. This market has expanded fivefold in recent years.
The interest rate charges for these payday loans are anything up to 4000%.
The scheme to businesses is to offer loans up to £10,000 at a rate of up to 2% per week – this sounds modest at first glance but compounds to 280% per annum. To borrow £10,000 on these terms for 12 months would costs nearly £11,000 in charges. Not quite as much as 4000% but still expensive!
Wonga advertise that a decision can be made in minutes based on online information. As with payday loans, the high interest rates charged will pay for the defaulting customers.
It is difficult to imagine what such small loans would be us! ed for, for a short period of time. A spokesman for Wonga said it expects firms to borrow for 16 weeks or less with many using the finance to cover customers paying late or machinery breaking down.
Loans will only be made available to businesses that have been trading for more than three years, turnover more than £20,000 per month, are registered for VAT and personal guarantees are provided by the directors, if the business is a limited company.
A spokesman for Lloyds TSB said “One concern we have is that if a firm needs finance this urgently it could be a real sign that there are serious problems. If so then taking this option could lead to business owners digging themselves into a bigger hole.”
Tim Corfield says “I would agree with the representative from Lloyds TSB. If anyone is considering taking this route, for goodness sake, take advice before committing yourself. How far is a loan of £10,000 to a business turning! over £20,000 per month going to go? – especially if it costs £21,000 to repay it!”
This entry into the market comes as figures show lending to businesses from banks is down by 3% a year.