Short-term or payday lenders as they’re better known, like Estate Agents, perform a necessary function. Your boiler or car can usually sense when the worst possible time to break down is and act accordingly. Then what?
Contrary to popular financial advice, most people don’t have any savings or the savings they do have are inadequate in emergencies. Research from the Social Market Foundation (SMF) and Money Advice Service has shown that 40% of people have less than a week’s worth of income to rely on.
Businesses need money quickly too and not many repair services offer extended payment terms or credit. Cash is king and for a lot of people the quickest solution is one of the UK’s many payday lending services.
The Consumer Finance Association is the trade association for the short-term lending sector in the UK and they commissioned a wide-ranging, state-of-the-nation report from the SMF on the sector in 2016 called A Modern Credit Revolution: An analysis of the short-term credit market and, maybe because it’s supposed to, it challenges a lot of misconceptions about the industry.
Some of the more interesting findings include:
Yes, the interest is high if a loan is taken out for an extended period and there are always questions about safeguarding people from inappropriately large borrowing but these unsecured, short-term financial products meet the needs of a lot of customers.
Many of whom are only borrowing from these companies because traditional funding sources such as high-street banks can’t or won’t help those customers out when they most need them to.
A lot has changed since Wonga went into Administration last year.
Despite this, the payday loan industry isn’t going to win any popularity contests and they’re probably fine with that but even they have rights and they can be subjected to unfair challenges or campaigns against them.
As the 29 August deadline for PPI claims approaches, many claims management companies (CMCs) have begun to look for their next target and seem to have chosen the payday loan industry to provide it.
The CFA said it has seen worrying tactics from CMCs targeting payday lenders by flooding them with complaints from lenders. One company received 1000 complaints from a CMC in 24 hours and they’ve got evidence that some are making complaints without permission of individual lenders and breaching data protection legislation.
Elevate, the owner of payday lender Sunny, said that in the last six months of 2018, they received more than 2,500 complaints from people who were not even Elevate customers. These complaints sometimes included personal information and in some cases a person’s employer and bank details.
They also received 21 complaints from customers who were unaware a complaint had been raised in their name or that a court action against Elevate had been undertaken. CMCs also lodged 204 complaints about cases that had already been settled.
Elevate also reported seeing an unusual pattern of behaviour surrounding new parts of the General Data Protection Regulation (GDPR) to send data subject access requests (DSAR) on behalf of their customers.
Under the law, anybody is entitled to access all data that a company holds on them and a DSAR is the method of obtaining this personal information. Elevate claim that some CMCs are making these requests without the knowledge of their clients in order to gain the private data which could then be used for profit.
In 2018, Elevate received 4,185 DSARs. Another lender received 500 in a single day while a different one received 250 in an hour.
CMCs help people reclaim money clients might not have otherwise gained, but they don’t do it for free and every debt management charity or consumer advice service recommend that people manage their own claim procedure.
The battle between Payday lenders and CMCs shows that even if you run a perfectly profitable business, unexpected and expensive problems can pop up from anywhere and cripple even the most prudent company.
We’re always standing by to offer a free consultation to any company that runs into trouble. Our expert staff can discuss all the options available to you depending on your unique circumstances.
We won’t apologise for our high interest level in saving your business and we guarantee that we’ll explore every avenue to achieve the best possible outcome.
For many directors that’s part of the enjoyment and why they got into business in the first place. Overcoming the odds, having their decisions and gut calls proven right and achieving things they and others wouldn’t have thought possible.
These are good risks. There are also bad risks.
If your business isn’t performing well, is stuck in a trough or heading for insolvency then the risks of making poor financial decisions increases.
Loan Stacking is one such decision and it’s made worse because at the time it can look like absolutely the right thing to do for the business.
What is Loan Stacking?
Most simply it’s where a company takes out two or more business loans from different lenders at the same time. This can be from banks or other regular financial sources or from newer lending streams such as peer-to-peer platforms, secondary lenders or fin tech.
Unlike applying for funding from a traditional financial source like a bank, secondary funding usually isn’t so stringent regarding collateral or background checks and can sometimes be secured simply on the basis of personal guarantees from directors or senior management.
As an example - let’s assume a company needs £30,000 to fund an extension or other business expansion.
Their usual, main lender A will only lend them up to £10,000. With some agility and cleverness and the use of personal guarantee, they can then obtain another £10,000 from online lender B and £10,000 from online lender C. Great! They’ve got the money they need.
The first problem will be if Lender A checks their credit files and finds that they’ve obtained the additional funding from lenders B and C. Not a lot they can do right? Wrong.
The terms and conditions of loan A (and B and C) might render it null and void if the company entered into similar arrangements knowing that they may not be able to pay the amount back. Also there will usually be a condition allowing a lender to pull the lending facility and demand immediate repayment - which any could do at any time.
The loan from lender A will usually be monthly but if the loans from B or C are from alternative finance providers then the repayment terms and dates may also be different.
Some operators demand different and moveable repayment dates - every 28 days rather than monthly for example, or they could even insist on repayment on a weekly or daily basis depending on the deal they struck.
Repaying multiple loans with moving or irregular milestones could be problematic at best and this is if your business is stable and running a profit. If you run into difficulties and start missing payments to one or more lenders then things can get real ugly, real quick.
Any insolvency practitioners that investigate directors’ behaviour and events to establish how and why a company ended up in administration or insolvency will take an especially dim view of favouring different lenders even before they are called.
Needless to say, defaulting on payments also has a negative effect on credit ratings which could also draw the various loans to the attention of the other lenders. It’s their job to check the credit worthiness of their clients - especially when their money is on the line and seeing you take out lines of credit in addition to what they’ve lent out is raising a big red flag.
There are other safer ways of raising business capital for a company beyond loan stacking.
Most lenders will be sympathetic to your case if you have a proven record of trustworthiness with them and can often offer extended borrowing facilities if a proportion of the original loan, usually around 50%, has already been paid off.
You can also look to refinance your business loan with another lender. This is distinct from loan stacking as a proportion of the amount you borrow from lender B would pay off the loan from lender A so you while you have borrowed a larger amount, you still only have to budget for one regular repayment and interest rate.
Ultimately loan stacking is another symptom that your business is going through a rough storm.
This can even be a positive for the company and the individual in the long run depending on how you react to it and the decisions you make now. Contact one of our teams of advisors to set up a free conversation.
We can look at the whole of your business with an expert eye and make suggestions on how you can navigate back to calmer waters or even head to port for repairs. Taking on more debt, even for the right reasons is like taking on more water - it will just drag you to the bottom quicker.
We've covered the issue of taking out loans to support a business in an earlier blog post and ultimately we don't think it's a great idea when it comes to multiple loans.
As mentioned above, this article will take a look at the future of payday lenders due to the Wonga troubles.
Wonga was originally founded in 2007, just before the credit crunch and the recession in 2008. The company offered easy access loans with repayment terms within 30 days. The concept of payday loans was originally founded in the 1980’s in the USA, when interest rates were deregulated and higher repayments could be demanded. However, payday loans became much more popular in 2008. This popularity followed the failure of Lehman Brothers, when obtaining credit through traditional means became much more difficult.
Wonga reached its peak of business in 2012, when they were seeking to allow instant approval of loans 24/7. The cost for Wonga customers, however, was heavy, with interest rates exceeding 4,000% per annum. Loans of a couple of hundred pounds could quickly spiral, leaving the customer owing thousands. At this peak, Wonga had over 1,000,000 customers in the UK, around 2% of the adult population.
Following this, payday lenders pushed their advertising too far, trying to appeal to consumers to take out their loans to buy luxuries. One of the most criticised campaigns was appealing to students, who would clearly struggle with repayments, to take out loans to go on holiday. 2014 was a particularly bad year for Wonga, which posted losses of £37m following profits of £84m two years earlier:
Losses increased to over £80m in 2015 and continued into 2016. Despite a cash injection of £10m from its shareholders, the payday lender fell into default and entered administration after almost a week of speculation over its position.
Following the FCA changes in regulation, payday lending has already started to evolve into a more customer orientated setting:
Interest rates continue to be high for pure payday loans, still at over 1,000%. This is likely to continue to hold the industry back. The market has taken more to guarantor loans, where interest rates are in the region of 50%. These loans can now be taken over 3 years, making them much more appealing for those with a poor credit rating.
In addition, there has been a significant rise in the availability of credit from more traditional sources. Credit cards are becoming more widely available again, with many firms offering 0% on transfers for 2 years or more. This allows consumers who are deemed credit worthy enough to effectively park debt by juggling their credit commitments.
Unless interest rates drop further, the payday loan may have seen its day. In the USA, where payday loans were created, many states have now banned these loans from being issued. The question remains whether the rest of the world will follow suit.
A common misconception is that when a company enters formal insolvency it ceases to exist. Therefore, the debt due to the company is written off. This is simply not the case. The insolvency practitioner appointed over the case has a duty to creditors to realise all assets to raise funds for distribution.
Customers of Wonga will still be expected to continue to make payments in line with their credit agreements, even with the company in administration. Customers should also bear in mind that, depending on the stance of the administrator, they may accept an offer of lump sum settlement at a discount. This is to save the costs of collecting and chasing the loan over time.
With Wonga now in administration, those who are still due compensation may be wondering how they would get paid. Under normal circumstances, when a company goes into administration, anyone with a claim against the company would be an unsecured creditor. This can leave them amongst a pot of hundreds, or thousands of other creditors. These are also unlikely to receive a return, with preferential and secured creditors being paid first.
In the event an FCA regulated firm enters formal insolvency, the financial services compensation scheme (FSCS) will cover any amounts due in compensation up to £85,000. Generally, the FSCS covers:
However, the FSCS does not cover long agreements and compensation surrounding these agreements. Therefore, anyone still owed compensation will have to wait to see if there will be any distribution to unsecured creditors in the administration, regardless of how far the claim has progressed.
The team at Business Rescue Expert have dealt with multiple FCA regulated companies who have experienced financial difficulties and can be contacted for expert advice if you have an FCA regulated business experiencing similar difficulties to Wonga.