The APR4SMEs campaign scores a major victory as the CMA moves to make cost of funding clearer for small businesses.
APR4SMEs isn’t going away. The campaign that seeks to cement the APR as a standard method of price comparison across the unregulated small business lending space has clinched its "first" victory. The Competition & Markets Authority (CMA) yesterday published its “Retail banking market investigation” report. As part of the report's “proposed remedies”, the CMA has “provisionally decided to make an order requiring all lenders that provide unsecured loans and overdrafts to SMEs to display on their websites rates showing the cost of these products up to the value of £25,000. These rates must be displayed in a form used under the existing (personal) consumer credit regime. This includes showing a representative annual percentage rate (APR) for unsecured loans.”
£25,000 is sometimes seen as a kind of dividing line between consumer and SME credit. £25k is too small an amount to affect the majority of business lenders – traditional and non-bank both. But the companies that will unquestionably be affected by the CMA ruling are the short-term, alternative business lenders. Typically balance sheet based, these lenders specialise in such products as unsecured short-term loans, credit facilities and merchant cash advance. Some such companies may claim that they are in fact exempt from the CMA order due to the fact that their activities do not technically constitute “lending”. Time will tell.
We’ve been tracking the APR4SMEs campaign for some time. The campaign is spearheaded by alternative overdraft provider GrowthStreet. The campaign began generating traction when Jeff Longhurst (CEO of the Asset Backed Finance Association) committed to raising the issue of introducing APRs with the Association’s membership – first through its Executive Committee, and subsequently with its Professional Standards Council. The campaign then received another shot in the arm in May, with the formation of the Innovative Lending Platform Association in the US. The group launched something called the SMART Box – a tool that aims to provide greater transparency around the cost of small business loans. Business users will be presented with a chart of standardised pricing comparison tools and explanations. These include “various total cost and annual percentage rate metrics”.
The CMA announcement has been met with measured enthusiasm from James Sherwin-Smith, CEO of GrowthStreet. He said: “Today's report by the CMA is a positive step forward towards the goal of the APR4SMEs campaign, which was started by Growth Street to make the disclosure of APR a mandatory requirement on all forms of commercial finance targeted at SMEs.”
But Mr. Sherwin-Smith also issued the following caveat: “However, the narrow scope of the CMA recommendation on APR is a source of disappointment, as it only covers small, unsecured loans, and website marketing. Therefore it continues to be the case that most finance products used by SMEs do not carry an APR, restricting firms’ ability to shop around and get the best deal, and allowing providers to hide the finance cost businesses ultimately pay via product complexity and related T&Cs.”
The CMA announcement comes in the wake of a recently-tabled Early Day Motion in the House of Commons from Helen Goodman MP (a member of Treasury Select Committee), relating to greater transparency in SME lending. That motion read as follows: “That this House acknowledges the value of small and medium-sized enterprises (SMEs) to the UK economy; notes that SMEs often have difficulty in securing fair and transparent lending rates; and calls on the Government to require lenders to provide an Annual Percentage Rate on any finance they offer so that SMEs can make informed choices.”