With the small business funding market still being a harsh environment, payday lender Wonga has announced its entry into business loans, giving companies access to funds within 15 minutes of application. Though any improvement to the small business loans market should be welcome, are high cost payday loans really the answer?
Wonga says it hopes to fix the ‘broken’ small business loans market. While it is true that small businesses might be finding managing their finances tough in the face of lack of funding, especially from the banks, high cost loans could be more irresponsible than current coping mechanisms.
Figures have shown that 26% of small businesses are funding their day to day with credit cards. With 57% suffering from late payment problems and 43% of first timers applying for loans being rejected, it’s easy to see how businesses may be driven to taking on expense short term debts to help with cash flow problems.
However – the figures show this option is perhaps not the solution businesses are looking for. Wonga have been reluctant to give exact APR percentages – they claim that as loans can be taken out for as little as a week, these numbers are not representative.
One example they have given shows a £7,500 loan lent over 16weeks, paying £360 in interest and a further £75 application fee. This makes the total amount repayable £7,935. Business loans will start at 17% APR – far above other forms of finance. However, higher risk businesses will pay more, both in terms of interest and in application fees.
This all makes payday loans an expensive option for small businesses. From a company that has been criticised for lending to individuals at 4,214% APR, payday loans need to be treated with care – or avoided entirely.
Invoice finance and crowd funding are both options outside the banks that can help small businesses, without submitting to extortionate interest rates.
The Funding Circle offers funding from 6.4% annually, getting money to companies within days. Invoice discounting and factoring release funds from invoices within 24hiours, only charging a small borrowing fee on final payment. The banks also offer more favourable rates – RBS charged an average of 2.9% APR last year on those small businesses who were successful.
So, if your business is looking for a cash flow solution or needs to fund growth, be sure to explore all your options before looking to payday small business loans.