MarketInvoice coverage in The Economist – Loan ranger: An online consumer lender spreads into small-business loans, and beyond
Loan ranger: An online consumer lender spreads into small-business loans, and beyond
PUBLISHED 10TH MAY 2012 ONLINE/ 12TH MAY 2012 PRINT
Read online version
IN LONDON’S jumble of young technology companies with funny names, none stands out quite like Wonga. That is not only because the firm sponsors Blackpool, a football team that may soon return to the Premier League, and Heart of Midlothian, a leading Scottish club. Wonga lends money, online, fast and for short periods. Since 2007 it has made 4m loans worth £1 billion ($1.6 billion) to individuals wanting cash in a hurry—and earned a heap of criticism from campaigners against pricey debt. On May 7th Wonga said that it wanted to lend to small businesses too. It also plans to set up shop abroad.
Wonga’s attraction is the ease with which anyone with a computer (or smartphone) can ask it for a bespoke loan. Would-be borrowers choose how much they want and for how long: up to £1,000, or £400 for first-timers, for up to 30 days. Wonga works out the cost in an instant: for example, £47.68 to borrow £300 for a fortnight. It calculates creditworthiness by drawing on all the public data it can muster plus what it has learned from previous loans. If its software says yes, the money lands in applicants’ bank accounts within minutes. Wonga’s critics say people short of cash are thus seduced into borrowing at exorbitant rates of interest. Wonga retorts that it chooses borrowers carefully, rejecting 60% of applications, and that 92% of its customers would recommend it.
Businesses are also promised a quick decision online, followed by the money. They may borrow between £3,000 and £10,000 for up to a year. For now only limited-liability companies and partnerships, not sole traders, may apply. They must have revenues of at least £20,000 a month and must have been in business for three years. The interest rate depends on Wonga’s automated assessment of risk, but starts at 0.3% a week, or 16.9% a year.
Suppose, says Errol Damelin, Wonga’s founder and chief executive, that a supplier fails to pay an invoice on time. Getting extra money from the bank may be complicated and slow. Wonga offers it to firms fast. Knowing money is available if needed, says Mr Damelin, should also give small companies confidence to take on staff or order equipment.
The government has been trying to encourage banks to be kinder to small businesses, but “the fact that Wonga is trying to expand into small-business lending”, says Pierre Williams of the Federation of Small Businesses, “merely confirms that the government’s efforts to get the banks lending sufficiently again…hasn’t yet worked.” One might also wonder whether the businesses most tempted to ask for a few thousand pounds will be those least prepared for trouble—although Wonga’s software should in theory turn these down.
Other young tech companies have already identified larger gaps in the financing of British business. MarketInvoice allows firms to auction individual payments expected from big companies: bidders from hedge funds to rich folk might offer £90,000 now for a £100,000 invoice due in a month or two. Anil Stocker, a co-founder, says that £14m has passed through MarketInvoice’s platform, £6m of it in the past two months. At Funding Circle, lenders bid to finance loans of up to £250,000 for up to five years. Loans worth £31.5m have been arranged so far.
Wonga’s ambitions are not limited to Britain. It is expected to say soon that it will offer consumer loans in other countries, and that it will start in Mr Damelin’s native South Africa, where Wonga has been running tests and already has a call centre. Whether his business will prove either as popular or as controversial abroad as it has in Britain, he is about to discover.