Simon Carter, Director of Touch Financial, discusses the more urgent problem behind the trend for payday loans.
It has recently been in the news that payday lender Speed-E-Loans.com Ltd has gone into administration after failing to secure much-needed business funding. This may seem like a positive point for payday loan detractors, but I hesitate to agree. I believe that the urgent need for short-term cash is representative of the times, and that payday loans exist to fill in a gap created by restrictive conditions that accompany traditional forms of lending.
Why Pay Day Loans Exist
Payday loans exist to fill a need within the consumer market and several of them have also moved into the small business funding marketplace. In the consumer market they fill the void left by more restrictive lender criteria to consumers with high credit risk, but with a move into the small business funding market they potentially satisfy a need in a market where smaller (especially micro) SMEs are desperate for cash and are not able to obtain it from traditional sources. I am not judging payday lending to be ‘good’ or ‘bad’, merely pointing out that the need within SME finance for short-term finance has paved the way for opportunistic lenders (both in the consumer and commercial spaces), and there are those who will provide finance to businesses that cannot obtain funding elsewhere. The basic rules of supply and demand allow them to do this at a very high cost.
The Underlying Problem
More regulations have to be set and enforced in order to ensure that existing payday lenders are reputable, but the press-bashing and public disgust for such businesses is, in my view, overhyped and somewhat misguided. It suits the government to jump on the same bandwagon amidst public pressure, but what it should be addressing are the endemic problems that make businesses feel compelled to turn to payday loans in the first place.
Every loan comes with a risk, and it seems unnecessary to be singling out payday lenders as lending pariahs. There are many reasons why a business may fail, but it appears that Speed-E-Loans’s main challenge was obtaining funding from its backers, perhaps due to public pressure. In my experience, profitable businesses or businesses with proven business models should always be able to source funding; if Speed-E-Loan’s business model was viable, then it should have been able to secure some form of funding. This is why I think that Speed-E-Loans’s downfall is due to a deeper, more fundamental problem. Perhaps it was its reputation that failed it…or perhaps it was seeking the wrong kind of business finance from the start.
Need for Change
I can only make an educated guess about Speed-E-Loans’s financial circumstances, but it is, I believe, representative of a larger problem. Given the restrictions on traditional forms of lending, the government should also promote alternative forms of lending, particularly to small businesses. Warning SMEs away from payday lenders does not help, unless they are given practical, viable alternatives to their funding dilemmas.