Funding dilemma for small businesses
Recent controversy about high interest loans to business has highlighted the problems facing small businesses that cannot obtain further funding from the bank. The peer-to-peer lending website Wonga.com announced in May that it would open up facilities for online business lending in addition to its existing procedures for personal loans. Loans up to £10,000 would be available to businesses for periods up to a year. Inevitably the interest rates will be much higher than those for bank loans. Wonga has suggested that these loans would be useful to businesses needing short term cash for purposes such as taking advantage of discounts for cash payment or for bulk purchases.
Wonga are not the first peer lending site to offer facilities for business loans. Other online lenders such as Funding Circlehave already moved into this area. For businesses the option of higher interest loans is by no means new as there have always been high interest alternatives to bank loans. Also, small business directors have frequently resorted to the use of the personal credit card to bridge short term gaps in funding. The main problem is that funds may not be there to repay the debt in the short term, leading to growing debts and compounding interest. A business may then quickly find it impossible to continue as a going concern.
A business that has been unable to obtain additional funding from the bank and is looking around for other sources of finance should explore all alternative avenues before looking at high cost loans from online lending sites. For example a business should look at freeing up extra funds through renegotiating payment terms with creditors to create more breathing space. A fresh look at debt collection may reveal that there is scope for collecting money earlier from trade debtors. Inventory could perhaps be managed more efficiently, reducing the need for expensive storage space.
Many potentially profitable businesses cease trading in their first few years owing to liquidity problems. The online lending sites have opened up one more possible source of funds. The responsibility is on small businesses to make correct decisions on funding. A potentially profitable small business must review the potential sources of funds and make a decision on the basis of accurate cash flow projections. Above all a business faced with a liquidity crisis should seek professional advice. An adviser will have a much better overview of the alternatives and opportunities and can work with the business to manage the situation in a way that will not lead to growing debt and interest problems.