By James Sherwin-Smith on Friday 15 April 2016
AltFi recently reported on an industry dinner they convened, bringing together senior representatives of various SME finance providers that operate a direct lending model. Growth Street was not eligible to attend given that we operate as a B2B marketplace. Amongst the issues discussed was the topic of APR4SMEs, a campaign started by Growth Street.
The article highlighted that some of the direct lenders in attendance had raised a number of issues with APR, which Growth Street believes is a much needed price metric to bring greater price transparency into the commercial finance industry.
“The subject of APRs – which has been cropping up a lot in the news recently – was raised. The platform bosses identified a number of issues with the usage of APRs.”
We would like to take this opportunity to answer each of the challenges reported in turn, and in a public forum where these points can be discussed in the open, rather than behind the closed doors between parties who, as direct lenders, have arguably vested interests in maintaining opaque pricing.
We have some experience of this, as we have received similar challenges before – for example in the interactions with the Asset Based Finance Association (ABFA) that have been covered on AltFi before. We have robustly defended why APR is needed against the similarly facile arguments and thinly veiled attempts that are used by some to hide their high cost of finance, typically by using complex products (and associated T&Cs) to dupe SMEs into paying a lot more than they anticipate.
For example, in a letter I wrote to Jeff Longhurst, the CEO at the ABFA, I strongly argued the case for APR, and we are releasing today the full text, which you can find at the bottom of this Growth Street blog. In my letter, I respond to Jeff’s initial rationale for dismissing APR with several reasons why he was wrong to do so, and I repeat some of these below.
To be fair to Jeff, he has since revisited his position and planned to raise the issue with ABFA’s Executive Committee on Wednesday this week. We await their response with interest.
“For some of the platforms, there in fact appears to be legal issues with the publication of APRs.”
This was a similar argument to that chosen by Jeff to open his rebuttal: “There would be a technical difficulty with your proposal 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.”
While we understand and recognise that asset based finance is not legally considered lending at present (a technical loophole in our opinion), we disagree that this technicality obstructs any commercial finance provider (asset based or otherwise) from disclosing APR for several reasons:
This is frankly, utter nonsense, and the type of argument payday lenders have used to defend their exceedingly high interest rates and associated 4 digit APRs. Short term finance can be extremely expensive. That is exactly why APR is needed to signal high costs where they exist and to ensure such arrangements are not entered into lightly.
We find it utterly unacceptable, and an alarming development, for at least one provider in the market to promote their finance product with a message of “no APR.” This is blatantly false, and hiding costs behind semantics. APR includes both interest and fees charged, relative to the amount borrowed, over the course of one year. I am certain the provider concerned is providing finance, and not for free. They will have to pay for the funds they make available to their customers, have operating costs to cover, and will undoubtedly charge a margin on top. To say there is no APR associated with their product is in our eyes, not only misleading, but verging on irresponsible.
“The difficulty of calculating APRs was also pointed out. A number of the lenders that were represented at the dinner specialise in credit facilities, that are drawn down by the customer as and when required – with the cost of funds varying depending on when the customer chooses to draw down and repay the money.”
We heard something similar from ABFA: “Comparison between a single rate or metric like an APR can work for a standard off the shelf product like a credit card or a personal loan. But for a service-oriented facility intended for businesses rather than consumers, there is a risk that one ends up comparing apples with pears.”
Growth Street began the APR4SMEs campaign to ensure all business owners are fully aware of how misleading finance providers can be, and actively consider transparently priced alternatives. We remain concerned that SMEs are being lured by deceptive practices that mask the true cost of finance. We want owners to know what they will pay when making such a key decision for their business, and not be left with a nasty surprise later down the line when it’s too late to unwind.
We urge every business to compare finance costs using the APR calculator on the Growth Street website to see what you are actually paying for business finance across a range of popular finance products and providers. You can also follow the progress of the APR4SMEs campaign online, including the broad the support the campaign has received to date.
Stakeholders from a variety of quarters are beginning to recognise that urgent change is needed in the commercial finance industry. The alternative finance industry to date has been built on a foundation of transparency – I personally hope the days of conversations behind closed doors to protect vested interests are over.