We will continue to fight for an APR4SMEs in the face of criticism from vested interests

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:

1. APR is a metric for establishing and comparing the cost of credit, and in so doing takes both interest and fees into account. Therefore how providers construct their charges (all interest, all fees, or a mixture of the two) is frankly irrelevant to the suitability of using APR as a uniform metric for comparing the cost of finance.
2. Most asset based providers present fees as a percentage (often referred to as the discount ‘rate’) multiplied by the amount of finance. The percentage is usually expressed by using bank interest rates as a benchmark plus a margin on top (i.e. discount rates are based on, and vary with changes to, a bank reference interest rate e.g. Bank of England Base Rate, LIBOR etc.). As such, the discount rate is a percentage that more closely resembles an interest rate than it does a fee, at least from a SME’s perspective.
3. Commercial finance in whatever form is, after all, finance. For example, asset based finance as a debt purchase mechanism certainly more closely resembles debt, than it does, say, equity.
4. Placing APR on a financial promotion is not a legal requirement for commercial finance, but this is exactly why we think the industry as a whole should take a leadership position and self-regulate. The absence of an APR, and the myriad fees charged by providers that apply under various conditions makes it extremely difficult for SMEs to compare, let alone predict, the cost of commercial finance. While it would be illegal not to carry an APR in certain consumer credit situations, we are aware of no legal impediment to providers voluntarily adopting APR – and we would welcome any feedback to the contrary.
5. To suggest that by carrying an APR SMEs would be misled is very hard to understand – more transparency and comparability of cost by using a well-used and widely understood metric, is, in our opinion, a measure that should be welcomed and is badly needed in the commercial finance industry.

“<> said one of the guests, before explaining that the short-term nature of his product means that APRs are in fact a poor reflection of price.”

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.”

1. We fundamentally disagree.  APR works extremely well today across myriad consumer products, including relatively complex products such as mortgages, where disclosure of an APR is a regulatory requirement. One could argue that by making APR mandatory, complex products have been purposely made simpler, benefiting users and increasing competition.
2. To argue that APR does not work for a particular finance product – whether it’s ‘service-oriented’, a revolving line supporting drawdowns, or something else – is simply false. All credit products include a service element to varying degrees, and APR remains a useful metric for cost comparison for other variable usage products e.g. credit cards.
3. The distinction between businesses and consumers is becoming increasingly blurred. Sole traders for example could be considered both, while the FCA, in its report into the mis-selling of interest rate hedging products to SMEs by banks, recently concluded that Limited companies below certain size thresholds should be deemed non sophisticated and treated more akin to consumers. 
4. APR is a metric that cuts across artificial boundaries – it is, by its very definition, a measure that allows consumers (and could therefore allow businesses) to draw a meaningful apples-to-apples comparison, independent of the provider and form of debt finance.

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.