Payday lender Wonga launches business loans

The controversial payday loan provider has begun targeting cash-strapped businesses.

Following the massive failure of its student payday loans earlier this year, Wonga has gone back to the drawing board and launched a new business loans service.

The new corporate arm of the payday loan company is now targeting financially vulnerable businesses strapped for cash with loans of up to £10,000. It promises a decision in only 12 minutes and funds available to successful applicants within anything from 15 minutes to 24 hours later.

Wonga says it hopes to help small- and medium-sized UK businesses stay afloat amid a poor borrowing climate.

The service was cunningly launched on the May Day Bank Holiday, highlighting the convenience of the site which is available 24 hours a day, seven days a week, meaning more impulsive and less thought-out borrowing will now be impacting businesses as well as individuals.

The rates

The APR on short-term Wonga loans has been calculated to total over 4,000% . So do the business loan rates look any better?

Approved businesses will be charged between 0.3% and 2% a week for loans ranging from £3,000 to £10,000, for any term between one and 52 weeks.

In addition, customers will also have to pay an arrangement fee of 1-5% based on the size of the loan and make repayments on a weekly basis or face penalty fees of £10 for each missed payment.

So, for a business borrowing £10,000 for the maximum term of a year with an interest rate of 2% and associated fees at 5%, the total amount paid on interest and fees alone is £10,900! This means a business could end up paying back £20,900: more than twice what they originally borrowed, which just doesn’t really add up.

So why would any business choose to borrow money in this way?

A short-term fix

An instant decision, a fuss-free process and money in your account almost immediately. On the face of it, it's a blessing to worried business owners in a bad financial situation that need help fast.

Wonga has described this venture as “a much-needed alternative for companies in need of an instant cash flow solution”. It seems to me like they are once again exploiting a bad situation and potentially making it worse.

With repayments collected each week it is easy to see how debt could spiral especially if you start to miss repayments, which is entirely possible, given the whole reason for borrowing in the first place was because of a bad cash flow situation.

Friendly warning

The creeping stranglehold Wonga could have on you and your company is in the small print. All directors or partners of the firm taking part need to provide a 'personal guarantee', which means that should the business fail to meet its repayments, they will be the ones who have to pay off the debt.

Wonga will play nice “providing you stick to your side of the deal” but things turn ugly  “if the business doesn’t keep its promise.”

The consequences of not sticking to the terms escalate quite quickly. If a business misses a repayment one week a £10 charge will apply. If this continues the guarantors are charged instead. If the guarantors default the debt is referred to a Credit Reference Agency and could be sold on.

With surprising speed money problems for your business could be made worse instead of better with one wrong move.

A real alternative?

The instant cash fix Wonga is offering fills the gap that is being caused by banks refraining from lending to small businesses.

Errol Damelin, founder and CEO of Wonga.com really believes he is offering companies a ”real alternative”, but it seems pretty clear that a business will worse off at the end of the process.