“Sunlight is the best disinfectant,” wrote Justice Louis Brandeis, or words closely hewing to that effect, and the curative properties of knowledge and discovery hold true in the world of credit, especially SME credit.
It’s well-known that traditional banks are hesitant to lend to smaller players across any vertical. It’s also well-known that any number of alternative lenders have made inroads into that populace, with short-term loans, bridge loans, equipment financing and securitizations and merchant cash advances.
But one small business lender, Able, is seeking to make its name with a different sort of currency — insight and illumination as to how stated interest rates and annual percentage rates (APR) really work on the loans that are in place.
Through the introduction earlier this month of Able’s True Rate Calculator, the SME lender lets would-be borrowers see just how much they are paying — with inputs that range from how many payments are made to what the origination fee is.
The rate, as you might guess, that is returned is the actual cost of carrying the loan and also, as you might guess, is frequently quite a bit higher than might be stated and certainly higher than would be assumed. The true APR is buried like a needle in a haystack, deep within fine print.
In an interview with PYMNTS, Evan Baehr, president and cofounder of Able, noted that the misinformation is one that can bedevil even the more sophisticated entrepreneurs, who are well-versed in running businesses. He relayed an anecdote of meeting with one CEO who certainly was seasoned, having built and sold two companies, and discussing MCAs, obtained via Web conduits. The stated rates were around 15 percent, but with calculations via spreadsheets and taking into account the additional fees (such as those tied to origination) and other charges, the actual rate was actually roughly 72 percent.
“These are educated people,” noted Baehr, “and they are not ignorant … but they are led to believe, by lenders and the contracts they have, that, on the first page, there is a 15 percent rate, and they may not be reading much further through the remaining 50 pages of the document and the fine print.” Eventually, the lack of transparency in the contract leads to a cash flow crunch as a significant portion of daily business operations goes toward satisfying debt loads.
These and other examples led to the rollout of the aforementioned True Rate Calculator. The calculator is a conduit to a concurrent rollout of the Able refinance product, through which firms can refinance upon viewing what they are actually paying and roll into financing that, as Baehr said, averages roughly 10.7 percent. The loans are structured with at least some backing from, say, family and friends, which has allowed the firm to charge lower rates.
Baehr stated that his firm is able to offer rates such as these against an online backdrop of peers where true APRs can be 50 percent or more, and yet, he said, at those companies, “though the interest rates are high, the margins are not necessarily strong,” which means that volume is important to those companies.
In the online industry, said the executive, self-policing would be an optimal solution toward greater transparency but is not likely to be enough. That has led to a groundswell of support for transparency, as has been contained in the Small Business Borrowers’ Bill of Rights. Able has been among those enterprises that has signed on.