Is there a scandal bubbling up within the small business lending space?
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.”
21 March 2023
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