The problem of comparing small business loans in Australia
The cost of a business loan is influenced by many variables. In addition to interest, you can have a range of fees – such as establishment fees and direct debit fees – that can significantly impact the cost of the loan. For example, you could try to compare two loans that have the same interest rate, but one has hidden fees attached and the other doesn’t. Based on the information you receive, you could choose the higher cost loan without knowing it. SMART Box™ standardises pricing disclosure to prevent this type of scenario.
Why SMART Box™?
In February 2018, the Australian Small Business and Family Enterprise Ombudsman’s Office released a report on transparency and disclosure in the fintech sector. The report found that 47% of fintechs believed that more needed to be done to develop transparency in SME lending. Based on the report, the Australian Finance Industry Association (AFIA) Online Small Business Lenders Code Of Lending Practice was developed by the Australian Small Business Ombudsman Kate Carnell, FinTech Australia, and thebankdoctor.org.
In June 2018, six leading small business lending fintechs, including Moula, signed AFIA’s Code of Lending Practice. In addition to agreeing to meet small business legal and regulatory requirements, the lenders agreed to implement a clear loan summary and contribute to a price comparison document developed by the Code’s organisers by 31 December 2018.
SMART Box™ is a tool to easily compare pricing of different online lenders’ small business loan products using several standardised metrics. SMART stands for ‘Straightforward Metrics Around Rate and Total cost’. The Australian SMART Box™ is based on the US version of the tool which was originally developed by the Innovative Lending Platform Association and released in 2016.
What is Moula’s connection to SMART Box™?
As one of the six original signatories to the Code of Lending Practice, Moula has played a key role in the development of SMART Box™ in Australia. Moula CEO Aris Allegos believes the new development fits with the company’s values and will help small business owners make better-informed decisions. ‘Since the beginning, Moula has been dedicated to transparency,’ he said. ‘We have always been upfront about what we offer and don’t hide costs. SMART Box™ will increase transparency and enable small business owners to get a realistic comparison of loans offered by Code-compliant lenders.’
How does SMART Box™ work?
SMART Box™ is a one-page disclosure document made up of two separate parts. The first part, found at the top of the page, shows the basic elements of the loan option being considered, including the Loan Amount, Disbursement Amount, Total Repayment Amount, the expected Loan Term, and Repayment Frequency.
The second part of the document shows six common loan pricing metrics: Total Cost of Credit, Average Monthly Payment, Total Interest Payment (TIP), Annual Percentage Rate (APR), Cents on the Dollar, and Factor Rate. In addition, one section covers whether there are any new fees or a reduction in the Total Payment Amount if the loan is paid off early.
Although understanding all the information is important, the metrics which will be most critical in helping you compare loan offers are APR and Total Cost of Credit. You can see an example of some of the SMART Box™ metrics here, but below is a breakdown of each of the sections.
Summary of SMART Box™ elements
Loan Amount – the total principal without interest and fees.
Disbursement Amount – the Loan Amount less the Origination Fee. If there is no Origination Fee, the Disbursement Amount will be the same as the Loan Amount.
Total Repayment Amount – includes the Loan Amount, Interest Expense and Other Fees.
Term – the duration of the loan and interval of payments (daily, weekly, fortnightly or monthly).
Total Cost of Credit – the total amount you will pay in interest and other fees for the loan (assuming repayments are made as per the loan contract). This does not include avoidable fees, such as default interest rates on overdue amounts, late payment fees and dishonour fees.
Average Monthly Payment – the Total Repayment Amount divided by the Term in months. Regardless of whether the loan requires daily, weekly, fortnightly or monthly repayment, the average monthly payment is a common benchmark for assessing the monthly cost. This does not include avoidable fees, such as default interest rates on overdue amounts, late payment fees and dishonour fees.
Total Interest Percentage (TIP) – Interest Expense expressed as a percentage of the Loan Amount, not including fees.
Annual Percentage Rate (APR) – the percentage rate that can be used to calculate the cost of the Loan, taking the reducing balance of the Loan Amount into account, expressed as an annual rate. This does not include fees. It’s critical for borrowers to look at this metric in conjunction with the Total Repayment Amount (which includes upfront fees, ongoing fees and interest).
Cents on the Dollar – the amount of Interest Expense and Other Fees (if any) payable on each dollar borrowed. This amount does not include an Origination Fee.
Factor Rate – the proportion of the Total Repayment Amount payable with respect to each dollar borrowed, excluding the Origination Fee (if any). For example, if a borrower is lent $10,000 and is required to repay the lender $12,000, including interest and fees, the factor rate would be 1.2.
Early Repayment – this section answers questions, either ‘Yes’ or ‘No’, on the effects of early repayment, including whether any early repayment will result in any new fees and charges, and whether early full repayment will reduce the Total Repayment Amount. It’s important to note that some lenders, whilst not charging early repayment fees, may still charge full interest for the entire loan term or a discounted amount thereof. With Moula, there are no penalties or charges for early repayment. If a loan is repaid early, we charge interest only to the end of the relevant fortnight.
Next steps for small business loan seekers
If you want to get a true comparison of loan costs, SMART Box™ offers a simple solution. Here’s how you can ensure you’re getting the best outcome for your business:
First, make sure the lender complies with AFIA’s Code of Lending Practice.
Second, ask for SMART Box™ before you sign any loan agreement.
Third, carefully read the document to understand the total cost of each loan, including all fees, and use it to compare each loan offer directly to other loans.
Here’s an example of a loan showing the most important metrics using Smart Box™.