Are the UK’s alternative lenders ready to publish APRs?

Certain types of small business loans will have to carry APRs in a little over a month’s time.

Certain types of small business loans will have to carry APRs in a little over a month’s time, which could have a marked impact on the UK’s alternative lenders.

In May of last year, the Competition & Markets Authority (CMA) published its rather hefty “Retail banking market investigation” report. Buried among its “proposed remedies” was a provisional decision to require lenders specialising in unsecured loans and overdrafts of up to £25k for SMEs to use annual percentage rates (APRs) to show the cost of these products. The proposed measure is set to become a reality in August, according to multiple sources. But are the UK’s alternative lenders ready?

Conrad Ford, CEO of mandated referral platform Funding Options, believes the APR requirement will be effective from 2^nd August 2017 – six months after the CMA Order date of 2^nd February this year.

“We're often asked for APRs and other easily comparable pricing information by our SME customers, but the truth is that it's notoriously difficult to compare the overall cost of different small business finance options, due to complex and opaque charges,” said Ford. “This new requirement for small business lending APRs is a welcome step forward in market transparency.”

But Ford also noted that cost is only one factor in small business borrowing decisions, with speed and certainty of funding both equally important.

The impending APR directive will not affect merchant cash advance firms, such as Liberis, because merchant cash advance is not technically considered lending. Nor will it affect asset-backed finance firms like MarketInvoice.

But the change will certainly be felt by some alternative lenders – including the likes of Iwoca, Ezbob and Fleximize – which specialise in small, unsecured loans and facilities.  

GrowthStreet is another business lending platform that would be affected by the directive, had it not taken the decision some time ago to publish APRs of its own accord. Former GrowthStreet CEO James Sherwin-Smith in fact led a vociferous campaign named APR4SMEs, calling on lenders, regulators and government to adopt the APR as a standard metric for measuring the cost of business finance.

In a recent blog post, Sherwin-Smith wrote that the upcoming CMA directive will make comparing costs “a lot easier for businesses”. But he has also suggested that the “narrow scope” of the remedy is unhelpful.

“Given the CMA is tasked with improving competition, and businesses can raise finance in different ways, a more universal price comparison remedy would have been more useful,” he wrote.

Sherwin-Smith goes on to write that a more consummate remedy, coupled with the advent of open banking, would lead to a far greater level of transparency around price. Open banking will soon allow price comparison websites to calculate the exact cost and effective APR of bank facilities by, in the words of Sherwin-Smith, “examining actual usage against product specific tariffs”. His basic argument is that this development, coupled with a more expansive APR requirement from the CMA, would significantly boost the ability of small businesses to compare the cost of financial products.

One group that will presumably take a keen interest in the upcoming APR directive is the Association of Alternative Business Finance. The trade association, which launched in February, represents ten of the UK’s small business-focused direct lenders.

Commenting on the arrival of mandatory APR disclosures, AABF chairman John Davies – who is also CEO of The Just Loans Group – said that the association welcomes all initiatives that provide clarity and transparency for SME borrowers. However, he said that customers are most interested in the total cost of their borrowing, and the cost if they fall behind on repayments.

“I can understand why defaulting to a broad APR comparison may seem to be a simple solution,” said Davies. “However, it is extremely difficult to calculate an APR for the various forms of business finance. Just one reason is the short period of time businesses take out loans for - often much less than the 12 months APR calculations are based on.”

“What is needed is a simple and consistent way for businesses to compare the total cost of a loan which all AABF members would subscribe and adhere to,” he continued. “This is the feedback I get from fellow AABF members.”