New disclosure form makes it easier for small Companies to compare loans

As alternative lenders for small businesses look to expand their market share in Canada, a number have banded together to bring more transparency to an industry sometimes criticized for taking advantage of borrowers.

Seven non-bank lenders, acting within the newly minted Canadian Lenders Association, will shortly be using a standardized disclosure form which makes it easier for borrowers to determine how much they are actually paying for financing.

Instead of having crucial information scattered throughout a compact multipage loan arrangement, the “Smart Box” brings all applicable payment details into one sheet. The expectation is that the standardized form will make it easier for borrowers to compare different lenders’ rates by factoring in both fees and interest.

“The Smart Box offers you that visibility to the whole cost of the loan over time, also APR [annual percentage rate], and pennies on the dollar; all different metrics that are important for considering how a loan may be viable for a particular retailer,” said Gary Fearnall, Canadian country director for On Deck Capital, a small-business creditor which helped develop the Smart Box instrument in america.

Along with On Deck, the other firms participating in the program in Canada are Company Capital, Evolocity Financial Group, IOU Financial, Lendified, Merchant Advance Capital and Thinking Capital.

The Canadian Lenders Association, the industry group bringing the Smart Box initiative to Canada, says the push to boost transparency is all about helping its members improve their own companies by getting more user-friendly.

“At the end of the day, a debtor will borrow based on the relationship they have with you as a creditor and the terms that you are putting forward,” CLA president Gary Schwartz said. “The easier we can make it for a borrower to evaluate that, the greater volume of loans which will come through.”

There is also, however, a feeling that the business is moving to boost its reputation and prevent future problems with regulators. Option creditors — or “advanced lenders,” the term preferred by Mr. Schwartz — fill a significant market niche, offering loans to early-stage businesses and smaller businesses who have trouble qualifying for bank loans. They also supply short-term cash infusions to aid with supply problems, hiring or advertising.

But with the briefer term-lengths and the greater risk-profile of borrowers, interest rates could be exceedingly large. “In some instances, if you are borrowing for a brief period and a huge sum, you could pay 35 or 40 percent interest,” said accountant Andrew Zakharia, founder of Toronto’s AZ Accounting Firm, which has customers using alternative financing. Firms from the alternative-lending space also have a tendency to be aggressive in their sales strategies.

“This is a place where there are a few men and women that are great small business owners, but possibly lack financial sophistication and if they have their backs to the wall and have a money crunch and need money elsewhere, the man who’s there fastest and has the shiniest pile of money is generally the one they move to first,” said Cato Pastoll, chief executive of Lending Loop, a peer-to-peer small-business lending platform that’s not part of the Smart Box initiative.

Increased transparency is a fantastic first step to enhancing the image of the business, Mr. Pastoll stated. But more needs to be done to be certain that small-business owners “do not get duped or manipulated into some unfair lending practices,” he said, citing concealed broker fees and loans which are structured to make it impossible for borrowers to repay early and save money.

The opinion is shared by Mr. Zakharia. The Smart Box initiative is a excellent beginning, ” he said, but just a select few lenders have joined it so much better. Another possible issue is that the enhanced disclosure requirements only apply to fixed-loan products.

Unlike in the USA, the Canadian Smart Box initiative does not cover other financial products, such as merchant cash advances. A merchant cash advance differs from a normal fixed-rate loan, in that the loan is secured against earnings, entitling the creditor to a percentage of the debtor’s income before the loan is repaid. Such loans typically include steep rates of interest and can make it tough to handle cash flow.

Mr. Zakharia cites one client who borrowed $25,000 with a merchant cash advance, and had to repay $30,000 over six months. “It is costing them $5,000 over six months to borrow $25,000. That’s very costly,” he said. “Truly the one where more transparency is required is merchant cash advances, that is where somebody has an extremely substantial cost of borrowing{}”

The CLA is working to expand the Smart Box needs to other financial products, such as merchant cash advances, Mr. Fearnall stated.

Courtesy: The Globe And Mail

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