Partner Article

SME Payday loans could have serious consequences

Wonga’s move into the business market could have serious long and short term consequences for companies who sign up for their loan offering, according to the chair of the North East trade body R3.

The UK’s best known payday loan firm recently launched a product aimed at struggling small businesses , but Steve Ross is concerned that this offering could cause more problems than it solves.

He commented: “The immediacy of such a loan, where you can apply online and have the money in your account within as little as 15 minutes, could make it attractive on the surface, but from the moment a business takes out an agreement, it will be compounding the debt issues that it is already facing, with interest charges mounting up extremely swiftly.

“Our members’ experience is that, rather than solving financial problems, payday loans can often escalate those that individuals are facing, and there’s no reason to believe that this would be any different in the commercial sector.

“A high interest loan for a business would therefore be inadvisable and we would certainly caution company directors from signing personal guarantees, without seeking independent legal advice.”

He is now encouraging businesses considering these loans to focus on survival for the medium and long term by negotiating with suppliers if they are going through a period of difficulty.

He continued: “Taking out a short-term loan is never going to be a solution to longer-term financing issues that businesses might be facing, and it’s very likely that the same pressures will reappear in the month following the original loan agreement, potentially leading to an unsustainable vicious circle of debt.

“Facing up to a company’s financial difficulties and getting advice from a qualified, regulated professional on how best they might be tackled has to be a far more sustainable solution for SMEs, rather than simply papering over the cracks with a short term loan. We hope management teams that are tempted to take this route exhaust every other option before signing up.”

This was posted in Bdaily's Members' News section by Ruth Mitchell .