Weekly blog by Philip King, CEO of the ICM - 'The price of success'

I've written several blogs about the payday loan industry in recent months saying, in summary, that I don't believe the concept of short term loans is fundamentally wrong and that emotion sometimes over-rides objectivity. But that does not mean that poor practice is ever acceptable. In particular I've ranted about the absence of evidence that affordability tests were being carried out and said the OFT should, in its final year, focus on this particular element.

Wonga's announcement that its pre-tax profits were up by 35% and bad debts were up by 89% has brought the sector back into sharp focus and - reading reports and commentaries - two things have struck me.

The first is Ian King, the Times Business Editor, observing that Wonga is one of the good guys in an industry that has appalling practices; by way of example he cites that it will not allow its customers to "roll" their loans more than three times and observes that the interest rates they charge are, for example, far lower than those incurred by running up an unauthorised bank overdraft. In my view, being cheaper than someone else isn't necessarily justification but it's certainly true and mitigates against some of the more emotional headlines we see. Indeed, elsewhere in the paper it's reported that loans cannot be rolled over more than twice and that Wonga stops racking up interest after 60 days to prevent debts spiralling too far out of control.

More worrying though is the quote from Wonga's Chief Executive, Errol Damelin, who is reported as saying Wonga loans were too small to be a significant problem and "it's very unlikely that a £200 or a £400 loan is what gets people into a financial mess". Perhaps by itself such a loan value won't, but as part of a vulnerable financial situation it can play a key role especially if it's taken out in desperation and as a last resort. I'd like to think Wonga is an exemplar in carrying out adequate and effective affordability checks but come on, Mr Damelin, get real - £400 MIGHT NOT be a problem for you but it could well be for some of your customers and potential customers!

 

 

Weekly Blog by Philip King, CEO of the ICM - 'Fatal distraction'

So Wonga has entered the business loan market and added to what is already a fast and dramatically changing landscape.  The introduction of services such as Funding Circle and MarketInvoice have already had a big impact on how businesses can source finance and the recent Breedon Report recognised that alternative funding sources are here to stay.  Couple that with last week's Bank of England Trends in Lending report which said….. "The annual rate of growth in the stock of lending to UK businesses was negative in the three months to February. The stock of lending to small and medium-sized enterprises continued to contract….." and you can see why Wonga might sniff an opportunity.  I'm not sure Wonga is a good solution for small businesses strapped for cash but it's little different to a small business owner funding his business using a personal credit card or two, and that's been happening for years.

 

What worries me more is the suggestion touted in the media and elsewhere that solutions like MarketInvoice are a cure for late payment.  They're not.  MarketInvoice allows a business to sell invoices to a network of institutional investors and it can release the capital tied up in those invoices in real time.  In the short term it can therefore address the cash-flow problem caused by late payment but it's not a cure.  Payment still has to be obtained and, if the invoice is not eventually paid, the amount will have to be refunded to the investor.

The problem as I see it is that – having obtained funding against the invoice(s) - the business owner has removed the immediate cash-flow hole caused by non-payment and can focus attention elsewhere.  The problem hasn't gone away though, and if there is a fundamental problem preventing payment it still needs to be resolved.  Let's not forget, and let's make sure that small businesses don't forget, that the best way to avoid late payment is to get the basics right: knowing your customer, agreeing payment terms in advance, invoicing correctly and promptly, and chasing payment immediately it becomes overdue.  Anything that slows that process, or distracts from it, could lead to far more serious problems; timing is all-important in the management of cash-flow and collection of amounts due and, while attention is elsewhere, the slow-paying customer could fail and become a bad debt rather than just a late payer.

Cashflow keeps business in business and good credit management is vital to maintaining that cash-flow. Mixing messages is not helpful.

http://www.creditmanagement.org.uk/bisguides.htm