Insolvency body warns over short-term loans

THE launch by ‘payday’ lender Wonga of a new business loans service has brought a warning from insolvency trade body R3.

Regional chairman Jeremy Oddie believes ‘short-term fixes’ are not the answer to cash-strapped firms.

Wonga for Business, which launched this week, offers cash sums of £3,000 to £10,000 within 15 minutes, and promises a “new way for UK firms to smooth out financial bumps’.

The London-based company Wonga, which has been criticised by consumer groups for lending to individuals at an APR of 4,214% said its business loans will offer rates starting at 17% APR.

Mr Oddie said: “A short-term fix is not what a struggling business needs – the focus must be on survival in the medium and long term. Businesses should be able to navigate a period of short-term difficulty on their own, by negotiating with suppliers for example, without resorting to high interest loans.
 
“Recent research found that a quarter of businesses in the North are regularly using their maximum overdraft facility. Lower consumer spending and rising costs mean many businesses are only servicing the interest on their debt.

“A high-interest loan is therefore inadvisable and we would certainly caution company directors from signing personal guarantees without seeking independent legal advice.
 
“We have seen evidence with payday loans of customers going for more than one a year or rolling them over and this could be replicated by struggling businesses.
 
“We would urge any business that is worried about its long term viability to seek the advice of a regulated restructuring professional.”