By Neil Slonim
Having been spurned by banks, many small business owners are finding a funding lifeline with non-bank lenders. Specialist asset financiers, debtor financiers, factoring companies as well as an ever increasing number of marketplace lenders now offer a bewildering array of options to SMEs.
An unfortunate consequence of the explosion in the number of non-bank SME lenders is the emergence of some less scrupulous operators, which have been described as “payday lenders to SMEs”. SMEs are already falling prey to these lenders just as individuals continue to be caught in payday lending traps.
The difference is that individuals are protected by the Small Amount Credit Contract laws that limit the fees lenders can charge. In the unregulated SME sector, some lenders can, and do, charge what they like or more to the point, what they can get away with.
The way some lenders charge for their loans can be so confusing it is almost impossible for the average small business owner to work out exactly what the real total cost will be and to make apples-with-apples comparisons with other offerings. The range of fees these lenders charge make the banks look like the good guys. There can be fees for applications, approvals and administration and these are just the ones starting with “a”.
So what is the solution?
One option worth considering is to require all non-bank SME lenders to quote their offering in terms of a standard Annualised Percentage Rate (APR) that takes into account all the fees and charges the borrower will be up for and expresses this as an all up annual rate. The benefits of an APR are:
- Ensures SMEs understand the true cost of borrowing and are able to make accurate comparisons with other offerings;
- Exposes the less scrupulous operators that threaten to tarnish the non-bank lending sector, which offers a legitimate and much needed alternative to the banks; and
- Increases the level of genuine competition because lenders are competing on a more even playing field.
The opportunity for the marketplace lending sector
A unique opportunity exists here for the marketplace lending sector to take the high moral ground on pricing transparency particularly relative to banks, which would probably be exempt from any APR regulation.
Leading the charge for compulsory disclosure of APRs would also improve awareness, which remains one of marketplace lending’s biggest challenges. In a way it might be a blessing in disguise that so few small business owners are aware of marketplace lenders because if awareness was higher, the level of confusion would be greater with the consequent increased likelihood of relatively unsophisticated borrowers being misled.
But not all marketplace lenders are supporters of APRs and it is true that there are difficulties in calculating APRs, especially when the facility is a come-and-go overdraft-type arrangement. Another argument is that APRs are not appropriate for short-term advances. On the other hand, it is conceivable the opponents of APRs may also be the ones who have the most to lose by its introduction.
Will self-regulation happen?
It is difficult to envisage the broad non-bank SME lending sector coming together to self-regulate. Could, or more to the point, would, the marketplace lenders collectively push for regulation? This too will be a hard ask.
While it is still early days, the marketplace lending sector has not yet made any announcements on the need for self-regulation on SME lending fees and charges. The reasons for this are many and varied. The umbrella industry body Fintech Australia, which was only formed in late 2015, is dominated by non-lending players. And differences even exist between the SME lenders, including between P2P lenders and the balance sheet lenders, personal versus SME lenders, short-term and longer term lenders, and lenders offering revolving facilities compared to fixed loans. And then there are the participants with slick websites that pass themselves off as marketplace lenders when they are not.
Lenders need to focus on the end users and acknowledge that borrowers don’t really care how their loans are funded, they just want to know if they can get the money and how much it is really going to cost them.
There are around 20 SME marketplace lenders already operating in Australia. A number of them are displaying genuine leadership in endeavouring to lift industry standards. For instance, Moula is the first marketplace lender to have an APR calculator on its website.
Moula managing director Aris Allegos said the decision to quote its offerings on an APR basis was motivated by “a commitment to ethical and responsible lending namely, transparent pricing with no hidden costs. More specifically, our APR calculator is an extension of our values, we’re hoping it’ll empower SMEs to make the right decisions when sourcing finance”.
In the UK, marketplace lender Growth Street has initiated the #APR4SMEs campaign, which is aimed at having APRs legislated for all non-bank SME lenders. Growth Street’s proposal is encapsulated in this submission to the UK’s Chancellor of the Exchequer. Growth Street chief executive James Sherwin-Smith said he hoped the submission “would raise awareness of the fundamental lack of price transparency in the commercial finance market, and bring the UK one step closer to providing small businesses with similar levels of protection that consumers receive”.
“Too many firms are getting ripped off by providers who deliberately try to hide the true cost of the finance they supply,” Sherwin-Smith said.
The lack of pricing transparency in the non-bank lending sector is common to Australia and the UK. It will be telling to see whether Australian SME marketplace lenders will decide to come together to emulate the UK #APRS4SMEs campaign.
Or will the government step in?
If non-bank SME lenders don’t self-regulate, sooner or later the government will.
Governments have committed considerable resources to protecting individual borrowers but oddly there seems to be an assumption that if someone owns a business they are somehow better informed or educated and therefore don’t have the same need for protection. But small business owners are people who are equally entitled to, and in need of, protection. The mandated use of APRs is one way to help achieve this.