Wonga launches business loans service

Loans of up to £10,000 will be available for up to a year but critics say costly borrowing for small firms is 'irresponsible'

The high-cost lender Wonga is launching a business loans service, promising to make funds available within 15 minutes of an application.

Wonga was reluctant to quote a typical annual percentage rate, or APR, for loans, saying the measure was inappropriate as they could be taken out for as little as a week. 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.

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.

Wonga is entering the business loan market at a time when firms are struggling to raise funding. Research in November by the Federation of Small Businesses showed that 57% of firms suffered late payment by clients but between 2007 and 2010 there was a 24% fall in successful loan applications.

More than half of small firms that applied for an overdraft and 43% applying for a loan for the first time last year were rejected.

The shadow business secretary, Chuka Umunna, criticised the government for failing to get banks to lend more to small- and medium-sized enterprises (SMEs). "That SMEs are being driven into the hands of Wonga is a damning indictment of the government's failure to get finance to successful SMEs," he said.

Anil Stocker, founder of the online financing firm MarketInvoice, expressed dismay at Wonga's entry into the market. "We were shocked when figures from the Small Business Finance Monitor appeared suggesting as many as 26% of businesses were funding their working-capital needs from credit cards. Turning to Wonga-style, extremely expensive loans would be even more irresponsible," he said.

In contrast, Funding Circle provides monthly repayment loans ranging from £5,000 to £250,000 "in a matter of days, not months" and charges from 6.4% annually. The loans, which are funded directly by investors rather than through a bank, are repayable over one, three or five years.

Royal Bank of Scotland said its average rate was 2.9% last year and it approved 90% of SME loans. "We aim to approve loans as quickly as possible, and this could be as soon as the same day if we have the necessary supporting information," said a spokeswoman.

Wonga said its short-term loans were different from those provided by banks, and were expected to sit alongside traditional bank overdrafts, bank loans and invoice discounting products, providing alternative or additional funding. Russell Gould, head of Wonga for business, said: "The product is targeted at businesses which have cash coming in every week, rather than two or three times a year."

Wonga's service will initially be available to limited liability companies and limited liability partnerships that have been established for three years or more and have sales in excess of £20,000 a month, and Wonga said it expected to broaden the application criteria and the loan parameters over time.

Errol Damelin, Wonga's founder and chief executive, said the company was trying to fill a gap in the funding market. "Young, entrepreneurial companies represent our best hope of a recovery, yet many are struggling because they can't get quick access to the credit that they need to cope with everyday challenges, such as late payment by partners or customers.

"Others can use funds for great opportunities like getting a discount by paying cash, or buying in bulk, and then repaying early when the goods are sold," he said.

Wonga said a clear cost of repayment would be calculated for approved applicants before they committed. In one example it provided, a firm is lent £7,500 for 16 weeks, paying £360 in interest, equivalent to 0.3% a week, and an application fee of £75, or 1%. The weekly repayments are £495.94, with a total repayable of £7,935.

A company that is deemed more risky will pay more. If it borrows £6,000 for 12 weeks, with interest at 0.8% a week and a £120 application fee, the weekly repayment is £558 and the total repayable is £6,696, it said.