Lending to small businesses has long been a sticking point in the UK, with traditional high street banks becoming increasingly averse to backing fledgling companies. Enter Wonga.
The VC-backed payday lender has built up a strong share of the market since its launch in 2007, with its lending platform offering loans of up to £400 for a maximum period of 30 days. And now the company, headed up by the enigmatic Errol Damelin, is moving into the small business community by providing loans of £3000-£10,000 for between one and 52 weeks.
A quick trip to Wonga’s website shows how apparently easy it is to secure a loan. Using its sliders, as demonstrated by quirky pensioner puppets in its TV adverts, Wonga claims to make an ‘instant decision’ and send out the payment within 15 minutes.
Overlaying this template onto small business loans creates a worrying possibility. Any company going to a bank for a loan will undergo a careful vetting process of its business plan, with due diligence quickly identifying companies which are deemed a risk and thus unlikely to be able to ever repay the amount. With Wonga, this screening process will be removed, opening up many businesses, which come along with a risky business model, to quick and easy money.
In its current guise Wonga charges 4,214 per cent annual representative rate (APR). Its new platform for lending to small businesses means that interest rates will range from a 16.6 per cent equivalent annual rate to 109 per cent, a figure which is much greater than those demanded by banks and peer-to-peer lenders.
Invariably it will be firms which have failed to net funds from other avenues which will turn to Wonga’s new lending offering, with the issues of a towering APR and fixed repayment date possibly pushing them into strife.
However, Wonga’s overhaul of UK finance does not stop with its foray into the small and medium-sized enterprises (SMEs) market. The lender is also now planning to get involved with child financial literacy, doing something which it describes as ‘innovative and educational’ through a digital medium.
It seems sad to think that after years of an absence in the UK curriculum of any form of money planning and financial responsibility it should be Wonga who rides in to the rescue.
With 4 million loans worth £1 billion already made by Wonga, it remains to be seen whether it can have the same effect on the SME community. But whatever happens, it seems that Damelin’s re-education of all things finance is only just beginning. Heavens.