SME Finance Space Short on Transparency

By Ryan Weeks on 18th December 2015

P2P/Marketplace LendingAlternative Credit

Is there a scandal bubbling up within the small business lending space?

SME Finance Space Short on Transparency

CEO of recently launched Growth Street James Sherwin-Smith certainly thinks so. And he’s not alone. Brian Moore, a spokesperson for The Campaign for Regulation of Asset Based Finance (RABF), has penned a forceful letter to Jeff Longhurst, CEO of The Asset Based Finance Association (ABFA). The letter calls for all members to publish a representative Annual Percentage Rate (APR) alongside financial products. The ABFA’s membership is comprised of a few dozen banks and traditional invoice finance providers. 

Mr. Moore’s letter reminds Mr. Longhurst that commitments number 2 and 3 in the ABFA code of conduct stipulate that member companies must act with integrity – dealing fairly and responsibly with clients and guarantors – and that members must provide clients and guarantors with “all the appropriate information” in a timely and transparent manner. But when it comes to publishing a representative APR, Moore asserts that the ABFA’s operating principles fall short of the mark:

“Clauses 3.1.1 through 3.1.8 within the Guidance then go on to state ways in which ABFA members should provide clients with information on fees and charges, however the Guidance falls short of being prescriptive in this area.”

Moore goes on to describe the asset based finance industry as suffering from a crippling lack of transparency – one in which the true cost of funds is obfuscated by complex tariff structures and hidden fees. Such comments are supported by the findings of a MarketInvoice study, published in May of this year, which revealed that the UK’s banking sector has been fleecing businesses for £758m each year on invoice financing – an overcharge of £425m.

How will Mr. Longhurst and the ABFA react to the call for greater transparency? To clarify, the RABF is lobbying the ABFA to require that all financial promotions and product documentation carry a representative APR. This feels like a somewhat difficult principle to oppose, as any counter-argument would by necessity hinge on defending the notion that business owners are better left in the dark when it comes to cost of capital.

Growth Street provides flexible overdrafts of up to £150k for small businesses, and is highly transparent around costs. Borrower rates vary case-to-case, but are typically 8-15% per annum. Growth Street recently launched an APR calculation tool, in order to assist SMEs in comparing the price of various forms conventional and alternative finance. CEO James Sherwin-Smith offered his take on the state of transparency within the small business lending space:

“SME finance is the next UK financial scandal in the making. Business lending is currently exempt from APR regulation, which enables some lenders to hide the true cost of this credit by advertising products using prices that either fail to include fees, or use rates for periods shorter than one year. Factoring providers typically quote charges as a low percentage over base rate; however, the fees found in the small print usually constitute the majority of the cost. The lack of price clarity available to SMEs means small firms are paying more than they should for commercial finance. Something needs to be done, and we will be campaigning for APR for SMEs, to form part of the wider government agenda to improve price transparency.”


Manu Duggal

30 Jul 2018 08:25am

Banks and customers have always played a game of obfuscation: banks charge different types of fees to reflect fixed and variable costs and borrowers seldom declare their true financial position. If an SME cannot calculate the cost of fees in terms of APR, it's arguably so naive it will go out of business. On the other hand, if high APRs from lenders reflect oligopolistic behaviour, there are 2 options: Competition Authorities or market competition.

Brian Moore, Spokesman, Campaign for Regulation for the Asset Based Finance Industry

23 Dec 2015 07:37am

Jeff makes some interesting points in his reply; I would say that we should never challenge the right of free independent journalism that is ‘regulated’ unlike the factoring industry. He is right that asset based lending is worryingly not covered by any financial regulation or the PRA and is instead covered by the Sale of Goods Act 1979 which also covers pawn shops. I do not believe when the Act was written that was designed to cover sophisticated financial products which even ABFA seem to be unable to work out the cost of borrowing from their members. He has failed to mention that appalling abuses of his members clients on an industrial scale that has been exposed in the Telegraph, Times, FT and the Treasury Select committee to name a few. The Telegraph led with an example of broker(s) been given substantial incentives to find struggling SMEs to put into insolvency to profiteer on their assets at the expense of HMRC and other unsecured creditors. He challenges RABF to give him example(s) of 90+% APR from his members – that can be easily be done. To work out how much factoring will cost is simple; There is a monthly admin fee based upon the maximum facility a company will require, an interest charge of x% above base rate and where necessary a mandatory invoice insurance. You put those into the Growth Street APR calculator and job done. Cleary the asset based finance industry like to keep this as a black art to hide the obscene profits. Brian Moore Campaign for Regulation of the Asset Based Finance Industry

Jeff Longhurst, CEO, Asset Based Finance Association

22 Dec 2015 04:15pm

We don’t intend getting drawn into a lengthy debate but this article is rather one-sided and so we just wanted to clarify a few things. Mr Moore sent us an email making some claims but providing no examples or evidence. We replied offering our views which are in line with our comments below. Firstly, re the subject of APR specifically. There is a technical difficulty inasmuch as asset based finance will generally be provided on the basis of debt purchase. In that sense, it is not lending and interest is not charged. So strictly speaking it would be misleading and potentially illegal to use interest rates or APRs. Moreover as the option to draw down finance or not (and if so, how much) lies in the hands of clients, determining the correct figure on which to base average cost of ‘borrowing’ is difficult too. It always will be difficult to do that for a flexible facility like asset based finance unlike for a loan, for example. But what we are actually talking about is transparency about the overall costs of finance to businesses and that is something the ABFA fully supports. Costs of Finance An asset based finance facility will often be a bespoke service tailored to the specific requirements and circumstances of the client. The two primary costs to a client of an invoice finance (because I believe Mr Moore is specifically talking about invoice finance) facility are very straightforward and easy to understand, and consist of a service charge and a discount charge; with the latter being payable only on the funding drawn down. These charges will be easily comparable between providers. Different providers calculate their costs in different ways but the charges will tend to reflect the providers’ assessment of administrative workload and, of course, risk. The market is extremely competitive and potential clients should shop around to ensure they get the most appropriate facility for them, which might not always be the cheapest in terms of the basic charges. For instance, there are some client businesses that use factoring for the service element (ledger management and collections) and don’t even draw down funding. These charges form the core costs and any other charges (that must be specified in the contract) relate to any additional services that the client requests or are occasioned by other events which might take the facility outside of the usual running of the facility. Again, these will be easily comparable between providers. A simple overall calculation of cost can be made by potential clients to compare an offer by one ABFA Member against an offer from another simply by taking the service fee against turnover and adding the discounting fee on an estimated average of funds advanced. Transparency I note that Mr Sherwin-Smith’s business provides overdrafts to businesses. Comparison between a single rate or metric like an APR might work for a standard off the shelf product like a credit card or a personal loan, or maybe even for a business overdraft like those that his business provides. But for a service-oriented facility intended for businesses rather than consumers, there is a risk that one ends up comparing apples with pears. I would argue that a prospective finance facility needs to be considered qualitatively, not just quantitatively. What is key is that SMEs understand the options available to them, what the benefits and costs are and are able to make an informed choice. Transparency about the overall costs of finance is key to that and is something that the ABFA fully supports and encourages amongst its Members. [Incidentally, the article mentions a press release put out by a peer-to-peer platform earlier in the year about ‘hidden’ fees. At the time we tried to get proper details from them about how they came up with the figures they used for comparison between the overall costs of the finance they broker and for the costs of more traditional invoice finance. But they were unable or unwilling to provide the detail so it is difficult to have a proper debate on that; suffice to say the figures for conventional invoice finance looked rather exaggerated and we suspect that the base level of funding they used was incorrect.] On the claims by Mr Moore about rates charged, it would be interesting to see how the figures have been arrived at. I should note that the Professional Standards Council (PSC) is independently responsible for maintaining and enforcing the Standards Framework under which all ABFA Members work. How to ensure transparency and comparability of fees is in everyone’s interests and if there are any specific examples of what is believed to be poor practice then the PSC would be keen to see them. For more information about the independent Standards Framework, including the ABFA Code, the independent Complaints Process provided by Ombudsman Services and the PSC, please go to: Invoice finance is a fantastic product which supports many thousands of growing businesses turning over £300bn. It can also help businesses that are experiencing difficulties as well. As above, ABFA Members operate under the independent Standards Framework and clients and prospective clients can expect to be treated fairly. If we are all of one mind in wishing to support UK SMEs and give them confidence in growing their businesses then I do not feel that using social media to make unsubstantiated claims to promote one product or provider over another is the best way to build that confidence. If anyone would like any more information about invoice finance or asset based lending then they should contact us at the ABFA ( Happy Christmas to all. Jeff Longhurst Chief Executive Officer Asset Based Finance Association

AltFi Berlin Summit 2019

AltFi is coming to Berlin this Winter for our first annual Summit in the City.

18th November 2019