New data shows that UK small businesses are taking on multiple high-interest loans from online lenders offering rapid access to cash, when some of the firms could be saving an average of £10,000 per month in interest.
For several years, responsible lenders have seen increasing numbers of businesses applying to refinance expensive loans. Many appear unaffordable.
Theodora Hadjimichael, chief executive of Responsible Finance, descibes how and why Responsible Finance and member CDFIs compiled and published new research to establish the scale of the issue – and what it reveals:
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Many businesses have ‘stacked’ loans (multiple high-cost loans at once), raising questions about whether lenders are undertaking proper affordability assessments and ensuring businesses are well informed of the risks they are taking on.
Commercial finance brokers were involved in 70% of the high-cost loans; since broker commissions are not legally required to be disclosed or transparent, research is needed into whether any lenders pay brokers high referral commissions, creating misaligned incentives.
Small businesses who were able to refinance with Community Development Finance Institutions (CDFIs) cut repayments by an average of £120,000 a year, says Theo, who says that “if a lot of these businesses were able to get to a CDFI first, they’d be on a much stronger growth trajectory, not having to take on expensive, potentially inappropriate product for where they were.”
Theo wants more businesses coming to CDFIs sooner and says that comes through partnerships and referrals, and investment into CDFIs so they can grow and be better known.
What next?