By Marcus Leach

News that Wonga, the high-cost lending site, is to start offering business loans has been met with words of criticism and warning.

Under Wonga's new business loans service, they promise to make funds available within 15 minutes of application. Loans of £3,000 to £10,000 will be available for terms of between one and 52 weeks.

The cost, including a variable application fee and interest, starts at 0.3% a week and the loans must be repaid in weekly instalments. The firm has been heavily criticised for lending to individuals at an APR of 4,214%, but claims business loans will be at rates starting at 17% APR.

Much of the criticism centres around the fact that Wonga have entered the business lending market at a time when many businesses are vulnerable and in need of cash.

“The knee-jerk reaction for any business going through a difficult period is to secure finance. While short-term loans can certainly plug funding gaps, they can also be unsustainable and expensive," Peter Ewen, Managing Director of ABN AMRO Commercial Finance and Chairman of the International Factors Group, said.

“Wonga has suggested that its loans should sit alongside more traditional forms of funding. Yes, businesses that are seeking finance need to look further afield than the traditional bank overdraft but they should also make sure they investigate, and understand, the range of alternatives available to them rather than rushing into the quick-fix credit that was so popular leading into recession.

“Today’s business finance landscape is fundamentally changed from the easy, debt based lending of pre-2008. More reliable, and cost-effective, options such as invoice and asset based lending are becoming increasingly popular. They offer better long-term value and help businesses to grow organically at a sustainable pace, using the finance locked up in their own assets."

“In this difficult economic climate, increased SME funding options are always welcome but businesses need to take a sound, considered approach to lending to make sure that they can go on, and grow, with confidence.

“Wonga hopes to fill a gap in the funding market that may not even be there. Evidence suggests that businesses are wary of seeking additional borrowing and that it is demand rather than supply that has reduced. In that case, time will tell whether this new offering from Wonga will have much of an impact.”

John Antunes, director SME and Channels, SAP UKI, said that any loan approached in a hurry should be done so with caution.

“Cash flow is one of the hardest aspects of business, particularly for SMEs during an era of economic uncertainty. Therefore, loans chosen in a hurry should always be approached with caution," he said.

"Despite being clearly advertised as brief financial respite to only help with immediate cash flow problems, without being able to accurately predict business conditions, it is a very risky strategy for an SME to take.

"Any decision with regards to finance requires serious consideration and the temptation to rush into arranging a loan without mapping out exactly when and how it will be paid back, could prove too much for some SMEs. Although confidence amongst the sector is reported to remain at an optimistic level, an amount of conservativeness is required if you are to protect your business.

"Obtaining advice and having a conversation with someone who can get to know your business, and the risks associated with is likely to lead to a better, more informed decision when selecting financial support. It may be that a short-term loan is exactly what your business needs, but the analysis of its effects — both possible and actual — is a must.

"SMEs, by their very nature, are agile in their ability to adapt to changing economic conditions. I would always advise SMEs to think carefully about any existing loans before adding another. Businesses should consider looking at other ways to finance their business — e.g. negotiate extended credit terms with suppliers or move to a ‘pay as you go’ model offered by other suppliers.”

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