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Any Viable Alternatives to SME Payday Loans?

The consequences of luring small business enterprises into a payday loan type of borrowing can indeed be serious if not fatal for some business owners. We are talking about the businesses which often have no easy access to standard lines of credit that big corporations have. Thus, it may be tempting, in times of financial strain, to turn to short term small loans provided by companies like Wonga that launched a new lending service for business customers - Wonga Business.

The welcome message reads:

“Small British Businesses are the lifeblood of our economy, yet many companies miss fantastic opportunities because credit is not available quickly… We believe business lending is broken so we are proud to launch a new alternative that is speedy, flexible and available 24/7.“

But at what price? As Steve Ross just was quoted in the previous post: the business will get its back broken under the heavy weight of interest payments on such a loan. Interestingly, there is no disclosure of fees on the Wonga’s website as they claim that each business is unique and they will assess the risk and tailor the interest rate accordingly. At the same time, they charge weekly interest and an application fee - already enough to think twice about getting a loan.

Well, since I worked with HSBC and other banks, I do not want to sound like I am against expensive short term loans. Clearly, some businesses may benefit from them and manage to repay them on time and meet whatever financial goals they pursued with taking out such loans. But I do believe that applying for a such a loan should be the last resort thing. I would start working with your bank first and see whether a merchant line of credit is availabe through some sort of overdraft. HSBC does have this product for its small business customers. Do not expect Wonga to be easier that your own bank.

Another option is to apply for a microloan. These loans are small loans that are designed to help small businesses grow and meet operational cash flow needs. In U.S. such loans are endorsed and provided through Small Business Administration’s Microloan Program.

But as I mentioned, payday loans may well serve the purpose and if you decide to go with one, you would want to do some research and understand how such a loan is going to fit in your budget and business model. The best piece of advice here is to research your options and various payday loan providers. Just as individual consumers have benefited from reviews and comparison charts of online payday loans, small business owners should do the same diligence and look for reviews and further information about payday loan companies.

Wonga’s small business loan program is new and they promise to issue loans at 17% APR at maximum which is hard to believe taking into account that they charge over 4000% APR on consumer cash advances. There are no reviews as of yet but these won’t take long to come in so keep an eye out for feedback from SME owners who went through the loan application process with Wonga.

This was posted in Bdaily's Members' News section by Andrea Smith .