The submission to the Treasury
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Measures to help the financing and growth of UK SMEs - our suggestions for the Budget Statement and Finance Bill
I am delighted to provide details of a simple and practical measure to help businesses in the UK: improving access to funding, increasing competition in the finance sector, enhancing growth and boosting employment.
We are submitting our observations and a suggested approach to affect change for you and others to consider as you approach this year’s Budget Statement. I am very keen to press this matter with you and your officials and hope that you will have time to meet with me to discuss further.
This measure is needed to ensure that all providers of finance to small and medium-sized enterprises (SMEs) offer the same information to SMEs – extending the same degree of transparency into the cost of finance that individuals enjoy. At present, and the details are contained below, commercial finance is unregulated, and there is therefore no requirement for providers to disclose the APR on any commercial finance product. This means that businesses lack the necessary information to compare objectively the cost of finance proposals and ultimately their expected liability in terms of repayment obligations.
The change that we ask you to consider is as follows:
All providers of commercial finance should, by law, carry clear and accurate details of an Annual Percentage Rate (APR) on their financial promotions to SMEs, in all forms that this is required. This single measure will enable businesses to take all relevant costs into account, including all fees as well as interest, when comparing finance options.
We believe that this change should be implemented through legislation by including it in this year’s Finance Bill, and consequently Company law as necessary. An alternative route would be self-regulation within the industry.
The background to the problem
According to our analysis of statistics from both the British Bankers’ Association (BBA) and the Bank of England, a stark omission in SME finance is the chronic undersupply of overdraft facilities to SMEs.
Data from the BBA show the number of approved facilities to smaller businesses is down from 227,000 to less than 119,000 per year in the last 13 quarters – a 49% drop. In addition, according to the Bank of England the aggregate balance of overdrafts drawn by SMEs has fallen from £20.9 billion in April 2011 to less than £12.6 billion by August 2015 – a 40% drop. The mainstream banks argue that the regulatory requirements to hold additional capital militate against the provision of SME borrowing; in short, it has been uneconomic for banks to offer this specific form of lending.
Overdrafts are the best tool for managing cash flow efficiently, as beyond a fee for the facility, you only pay interest on what you borrow, when you borrow. This makes it an ideal solution for short term working capital needs. Businesses have regular expenditure: salaries, rent, VAT etc., however, their income and its timing may be less certain.
Overdrafts are a simple to use, easy to understand product. As business overdrafts have been removed, businesses have either been forced to go without finance, or to adopt less flexible, more complex and expensive alternatives, such as factoring and fixed-term loans.
Commercial finance falls outside the scope of the Financial Conduct Authority (FCA) and is exempt from APR regulation, enabling providers to hide the true cost of credit by charging significant fees that are hidden in Ts&Cs. Promotional materials for consumer credit products (such as mortgages, credit card and loans) are required to carry an APR. There is no such protection for businesses who operate through limited companies, making it difficult for firms to compare the cost of finance and meaning many are swindled into paying far more than they should.
The FCA and the Competition & Markets Authority (CMA) have both investigated the supply of SME banking services in the UK. The joint FCA/CMA study delivered its report in July 2014. The CMA then continued its formal Retail banking market investigation, including SME banking markets alongside its review of the personal current account (PCA) markets. The CMA delivered its provisional findings and possible remedies last October. The CMA noted:
“[I]t is difficult for SMEs to compare prices and other terms across banks. Prices are opaque and lending products are complex. Banks do not publish indicative tables of interest rates and management fees unlike other lending products such as residential mortgages. In addition, there is a lack of tools to help SMEs make comparisons, which may particularly affect smaller SMEs without specialist financial capability. There are a small number of business loan price comparison services, although these provide no information on interest rates and only limited information on other terms.”
Further, the CMA noted that:
“[T]he generally bespoke nature of SME loan pricing, which will typically reflect the specific risks associated with a given SME customer, has meant that it is difficult to carry out an equivalent analysis of prices on SME lending products.”
If the CMA itself struggled to analyse prices, it is clear that SMEs themselves need support.
In their analysis of the adverse effects of competition on the SME banking market, one of the possible remedies proposed by the CMA is to create a price comparison website for SMEs. However, without a standardised price indicator that is mandatory for all providers to supply, it is unclear how SMEs will be able to effectively and efficiently compare prices.
Our solution, as indicated at the beginning of this submission, is to enact a law which requires that the APR is clearly indicated on all financial promotions made available to SMEs, so that they can easily compare prices across products and providers.
Growth Street: our story
Given our assessment of this issue we are happy to admit our vested interest in ensuring that SMEs, especially limited companies, receive the best possible prices for their borrowing. That is our business.
Growth Street is a new way for businesses to fund their growth. It is a platform that provides flexible, fairly priced business overdrafts for profitable, growing and well managed SMEs.
At Growth Street, our pricing is clear; we charge a 2% + VAT fee for the facility and businesses only pay for the finance they use thereafter. Our interest rates are currently between 8% and 15% per annum. Unlike the expensive, opaque alternatives, SMEs only pay interest for what they use, when they use it; drawing down and repaying funds to meet their needs.
Growth Street offers a two way solution: competitively priced finance coupled with insight on business performance. Our assessment of borrower needs includes a thorough review of a company’s financial data, exchanged via cloud-based software. This data analysis is complemented by manual underwriting expertise.
We get to know the story behind the numbers by talking to managers and owners. We share our insight into the financial performance of the business with the management team, and use this to offer appropriate finance on better terms.
Our mission: helping SMEs to grow
We share your vision of an enterprising UK economy that is fueled by the ambition, jobs and growth of the SME sector. We are playing our part in this. By legislating to make APR mandatory for commercial finance, we hope that SMEs can access and select finance on more competitive terms, by making informed choices between products and providers, supported by transparent price information.
We cannot yet put a figure on the impact of this change, but we believe that by making APR mandatory, SMEs will access finance at a lower cost, which will increase competitiveness and productivity, and further stimulate growth and employment.
We have been vocal on this issue previously and intend to continue to raise it where we can, both formally with you, and publicly with others interested in improving the competitiveness of SME finance.
We look forward to your analysis of this suggestion and would welcome the opportunity to share with you the underlying basis for it, including our own data. I know that you and your colleagues are always very busy ahead of the Budget Statement, but we hope that we can meet with you, and officials, on this important matter. We will follow up with your Private Office in due course.
We look forward to hearing from you.
CEO, Growth Street