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Payday Lender Wonga Now Offering Business Loans

by Jim ONeil on August 19, 2012

in Payday Loans News

According to data from the Bank of England, UK business lending is declining by more than three percent annually. Wonga, a major provider of payday loans in the UK, recently began offering business loans. After completing a 15-minute application, a small business owner can receive a £3,000 to £10,000 loan with a repayment term between one and 52 weeks. These loans feature a variable interest rate that begins at approximately 0.3 percent per week. Borrowers must pay an application fee and make weekly repayments on the financing.

Wonga leadership decided to enter this market because it identified a need. Company founder Errol Damelin commented that the practice of lending to small businesses is “broken” and Wonga wants to provide a “real alternative” to business owners. The company is targeting its short-term lending at businesses with urgent cash flow issues, not those that need long-term financing. Critics say that Wonga entering this market is an indicator of how bad things have gotten with business financing.

Christopher Shaw, the CEO of Platform Black, an alternative finance specialist, is one of the critics. He believes that with this type of loan, there is a high likelihood of financial pain. Mr. Shaw commented that taking on high loans APR to meet immediate needs for cash flow is one of the worst things a business can do. He said that though UK small and medium enterprises require “fuel” to reboot the economy, they should not be getting it at these costs.

Wonga began just over four years ago by offering a short-term loan approved within 15 minutes and deposited into a bank account within a half-hour. Since its inception, the company has provided four million loans with a value of £1 billion. Mr. Damelin compared the development of the company to that undertaken by Amazon. He revealed that the ultimate goal of Wonga is to be a “really meaningful, relevant business” within the financial services sector.

Initially, Wonga will target limited liability partnerships and companies in business for three years or more with more than £20,000 in monthly sales. The company says that business owners should not look at loans APR when considering this financing because most loan terms will be less than one year. However, entrepreneurs may need to convert the interest rate to an annual figure when comparing financing to find the loans cheapest for them.

The variable interest rates for Wonga small business loans begin at a 16.6 percent equivalent annual rate (EAR) and range up to 109 percent EAR. This is much higher than the small business loan rates charged by peer-to-peer lending arrangements or banks. However, Mr. Damelin said that availability, complexity, and speed are often more important factors to small business owners.

Later this year, Wonga plans to offer savings products to consumers. Mr. Damelin acknowledged that banks play an important role by providing customers with a safe environment for depositing money and executing financial transactions. He said that he wants to add value to this through innovation such as using technology to provide better service.

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