Wonga’s new short-term lending service for businesses isn’t just about responsible lending, it’s also about responsible borrowing, writes Jason Hesse.
Wonga has turned the consumer short-term borrowing market on its head, making products more consumer friendly and opening the loans industry up. Now it hopes to do the same with short-term business loans: the company announced Wonga for Business earlier today. Yet, since its launch in 2007, the company has been repeatedly harangued as just another irresponsible loan shark, ripping off innocent cash-strapped Brits. Should businesses be concerned?
We’ve all seen Wonga’s supposed 4,214 per cent APR. It certainly looks bad. But annual percentage rates aren’t relevant to a short-term loan facility; the annual rate just confuses the true cost of the loan. Take this example: were you to borrow £20 from a friend and pay them back next week, buying them a £3 pint to thank them, it would sound reasonable, right? Yet, if this were a loan, and you were to compound it, it would signify a 143,000 per cent APR.
Consumers can only borrow money for a maximum of 31 days. Get rid of the artificial compounding and the maximum interest rate is around 360 per cent. This certainly isn’t cheap, but it isn’t the loan-shark product you associate pay-day lenders with.
Wonga for Business does not display an APR, as this isn’t required for business loans, only consumer loans. But a spokesperson tells me that if you calculated an equivalent rate for a 52-week Wonga for Business loan, the annual rate would start from just under 17 per cent.
“It’s a weekly repayment product, so it’s really not relevant. The weekly rates (risk-based pricing) are 0.3 per cent to two per cent, on a per-£1,000 basis. It’s the equivalent of £3 to £20 per week,” he says.
Wonga for Business offers cash injections in increments of £50, for between £3,000 and £10,000, for any term between one and 52 weeks. Only limited liability companies and limited liability partnerships which have been established for three years or more and have sales in excess of £20,000 per month are eligible.
Short-term borrowing for businesses hasn’t seen much innovation, despite it being a market with strong demand. Between 2007 and 2010, there was a 24 per cent fall in the number of successful loan applications made by SMEs in the UK. Thirty-three per cent of European SMEs who applied for a bank loan did not get any credit or got less than they applied for.
“Young, entrepreneurial companies represent our best hope of a recovery, yet many are struggling because they can’t get quick access to the credit that they need to cope with everyday challenges, such as late payment,” says Wonga founder Errol Damelin in a statement.
“All our research and speaking to other entrepreneurs tells us that small business lending is broken and we intend to use our platform to offer a real alternative.”
Damelin’s new proposition sounds reasonable to me and, frankly, it’s time to stop blaming everyone else when things go wrong. People who use Wonga need to accept responsibility for their actions. It’s simple: when you take out a loan, you owe money and it’s up to you to pay it back on time. Otherwise, don’t take someone else’s money.
That goes for business, too.