Amongst firms with a viable business plan, external finance is often a key requirement for business creation, survival and growth, particularly where personal and family-based resources are insufficient and a business cannot generate sufficient surplus cash flow to provide internal funds. Commercial banks often fund this requirement. However, despite having a credible business plan, some firms cannot access commercial funding, debt or equity.
Banks and mainstream asset finance providers have provided the bulk of the growth in gross new funding facilities for SMEs since 2011, but a key trend over this period has been the rapid growth of alternative sources of finance. As these have grown from a low base, they have reported high rates of growth but they now account for nearly 10% of the market providing a real challenge to mainstream providers such as high street banks as well as being at the forefront of new technology in both lending techniques and relationship management. Moreover the growing range of finance providers suggests UK SMEs have greater choice than ever before in the supply of external funding.
Given the growth in lenders how can a business navigate its potential funding options to choose the right one? In the consumer lending market, regulation requires lenders to display consistent information about the cost of borrowing, fees and repayment terms, therefore consumers can make like-for-like comparisons before taking out a loan. In contrast the business lending market is unregulated and as a result information on cost of borrowing and terms are often opaque. Without standards around transparency and customer treatment, lenders have more room to tread into unethical territory.
For responsible finance providers transparency is a central tenant to responsible lending. Part of treating customers fairly is ensuring that before taking out a loan the customer understands the cost and terms and how that will impact on their personal and/or business’ finances. Responsible finance providers will not lend to a customer if debt and its associated costs will make the customer worse off or not improve their business’ trajectory.
Unfortunately this ethos is not shared by other lenders on the market. Without regulation we are seeing trends that mirror those in the consumer lending market before the Financial Conduct Authority (FCA) intervened: a lack of transparency around pricing and inconsistency in affordability checks.
Reviewing commercial lenders’ pricing on their websites it is difficult to unpick what the overall cost of credit will be and what (if any) fees are attached. Whereas responsible finance providers such as ART Business Loans and Let’s Do Business Group display the full cost of borrowing upfront. Below is a survey of other business lenders in the market.
| iwoca | Capital On Tap (business credit card) | Funding Circle | |
| Representative example on website | Yes | No |
No |
| Monthly Advertised Rate | 2%-6% per month | 0.79%-7.4% per month | N/A |
| Current Annual Rate Range | 40% per annum (fixed) | N/A | 3%- 21.9% per annum |
| Maximum Term | 12 months | N/A | 60 months |
| Maximum amount | £150,000 | £25,000 | £500,000 |
| Fees | No fees | No information on fees other that they can ‘be incurred’ | 1.5%-6% arrangement fee, up to 15% missed payment fees, up to 15% default fees |
Although it is difficult to make a judgement on what is ‘high cost’ for businesses given the range of products, business’ working capital needs and risk profiles, what is certain is that critical information is not presented consistently and therefore businesses are not making informed borrowing decisions.
There is also evidence that affordability checks are not regularly conducted, and businesses are sold products with repayment terms that are not feasible for them. Together these issues mean that businesses are not choosing the right product and entering into unaffordable contracts. Then there is the additional risk that in an unregulated ‘wild west’ market lenders can get away with extortionate interest rates and hidden fees as well as not exercising fair practice when a business encounters difficulty repaying; all trends that we saw in the consumer lending market that could be latent in the business lending market. As business loans are term loans, we will not realise the extent of detriment to businesses until several years from now.
Regulators and legislators should take note and properly investigate transparency and affordability in the business lending market. This will avoid an unsustainable debt crisis similar to that which emerged from rapid and unregulated growth in the high cost consumer credit market. Fair practice, such as that championed by responsible finance providers should be a regulatory requirement. Furthermore responsible finance providers should have access to the funding and tools that will enable them to scale to reach more SMEs. As small business are the backbone of the UK economy it is crucial that they have access to responsible products and support that will enable them to grow and prosper.
We recently submitted evidence to two Government inquiries on Business finance. Our submissions are available in the Consultations area of our website.