If Wonga works for business, something is VERY wrong

The growth of the “pay-day loan” firms in the UK (and not just in the UK) over the last few years has been a sad reflection of difficult economic times.  Watch day time TV, or open one of the less salubrious newspapers, and the ads are everywhere – offering money instantly. So in a typical example, you borrow £265 for 12 days to tide you over till your monthly pay hits the back account. Then you pay back £302.52.

That might not seem too bad – a fee of under £30. But the APR (annual payment rate) is a mind-boggling 4214%! So the problems arrive if you can’t pay back the £300; it ratchets up very quickly, and before you know it, a few hundred borrowed can become a few thousand.

But now Wonga – one of the UK market leaders in the sector – have announced that they’re moving into the business market, providing short-term loans to small businesses. According to the Sunday Times last week,

“The new product, Wonga for Business, gives customers access to funds of between £3,000 and £10,000 within 15 minutes. After a quick assessment, a business can qualify for cash with interest payments of 0.3% to 2% a week. There is also an arrangement fee, a one-off payment of up to 5% of the loan amount. Applicants must provide information about the business and its founders, who personally guarantee the loan”.

Is this a worrying development?  It suggests a failing of the banking system if Wonga can make a business out of charging rates that are very high compared to a traditional bank loan or overdraft, although arguably the risk profile is different. but one might assume that Wonga can stand a much higher default rate than the banks, given their higher rates.

When we look at this in the context of organisations in our supply chain potentially resorting to options like Wonga, there are legitimate concerns for procurement  – and finance – executives. Visibility is one - how would a buyer know if a small supplier was getting into debt with Wonga? Would is be as visible as an overdraft for instance?

But, on the positive side, we’d like to think this might be a wake-up call for buyers who don’t consider their suppliers' financial position too often or too carefully.  Do you understand which of your suppliers are critical to the effective running of your own organisation? Do you know what financial state they’re in? Do you meet your own payment terms – or do you use suppliers as a source of cash flow benefit when you need it by delaying payments? Might that push a small but critical supplier into the arms of Wonga?

It’s also worth understanding more than first tier suppliers. A CPO of a very large and well known organisation told me that when they did the analysis, the real shock was identifying a small number of technology and software firms at second and even third tier level in their supply chains, whose failure could quite literally have closed down a large chunk of their organisation. These providers needed nurturing and a closer relationship with the ultimate user.

Perhaps Wonga’s incursion into this market will also lead to an increase in organisations considering supply chain finance options. For organisations with a secure finance and cash position themselves, using that to help participants in their supply chain can be a real win:win situation.  Getting a short term loan for a month is equivalent to a buyer offering payment terms of 15 days instead of 45. Given that it looks like such a loan is going to cost the supplier at least 5% of that sum from Wonga, offering faster payment in return for a discount of 3% would in this case be a good win:win for a cash-rich buyer and a cash-poor supplier.

And technology is probably moving as rapidly in this field as in any part of the procurement and supply chain universe. Solution providers such as Oxygen Finance, Tradeshift and Taulia are opening up new and genuinely innovative options for organisations to use supply chain finance as a positive and profitable tool, whilst assisting valuable suppliers who may need a little help. So if you haven’t looked at this area, now is a good time to do so – before Wonga and the like worm their way into your supply chain!

Voices (3)

  1. Paul Wright:

    There is a problem that banks just will not lend – they are trying to run down their loan books, and so have little incentive to undertake any new lending. Banks have failed smes and micro businesses by insisting that loans are repayable on demand, refusing to swop loans between banks and insisting on personal guarantees. This is all very understandable from their point of view, but ultimately means that finance is inaccessable to many businesses.
    As a result many startups, micros and smes are under capitalised, and reluctant to grow. I know my personal experience with business banking has reduced my interaction to a purely transactional cash basis (transfers in from clients, out to suppliers). This is not good for the businesses, the banks or the economy – but I don’t see how we are going to get out of it. It has created a niche for Wonga.
    The only time I asked my bank for an overdraft (for 14 days, against an invoice for completed work with a letter from the client promising payment) they refused. When I went with £20k in the account, they offered me a loan. When I went to talk to them about expansion the bank manager apologised and said he had no discretion, and it would be entirely on the basis of last years figures (not the previous 8 years). Which is better than the last time when I wanted to review my account with them, and they said I could only talk to them if I paid them £50.
    When banks refuse to talk to their customers, or have a meaningful relationship, then it creates opportunities for new players such as Wonga.
    Personally I hope never to have to use them, but I can see why others might – and not even firms that are failing. We all know firms put under by banks insisting on repayment of 10 year loans after 1 year, and similar. Why risk it?
    Apologies for the rant.

  2. bitter and twisted:

    What about small buyers buying from big suppliers?

  3. eSourcingSensei:

    Oh dear.

    Is the the banking world in such dire trouble that a company such as Wonga is needed to provide an injection of cash into struggling businesses.

    I would like to hope that your sentence “But, on the positive side, we’d like to think this might be a wake-up call for buyers who don’t consider their suppliers’ financial position too often or too carefully”

    There is (at least I think I have this right) a move coming that will restrict the payment days that can be imposed on companies. I know businesses agree within a contract so they are not imposed but if you are a small business you tell a major player they cannot have 60/90 or 120 day payment terms and se if you retain business – maybe not – so you can argue both ways if payment terms are “imposed”.

    Let me site a position I am aware of. I know of a company that has a supplier on 270 days (YES 270!!) payment terms (they are not UK based). They receive the goods, receive the invoice, use the goods, sell on their finished product, possibly (although not always) receive payment for the goods they have sold and THEN they pay the original supplier. Sounds crazy. No its true.

    There are moves to cap payment terms across Europe. France already does this in certain markets and Italy is due to introduce it later in 2012. The issue with the Italian proposal (which focuses on only one market which I think is fresh & frozen foods) as it currently stands is there is huge flexibility in what counts and what doesn’t and everyone is waiting for clarification from the government, however it will be in place by November this year and all traders will need to be compliant with the new rules by then.

    The EU were looking to cap across the whole of Europe at a maximum of 60 days. I do not know if that is the case any more.

    So with all of this the larger business have an increase in the cost of cash as they tend to bethe ones imposing the longer payment terms, but for the rest it hopefully increses their cash flow and reduces the cost of cash.

    Now doing something along these lines in controlling payment terms across all of Europe is I think on the whole a good thing. Wonga brining their loan style into the business world is frankly worrying

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