The challenge of comparing small business loans
Several variables influence the cost of business loans. Besides interest, there can be a range of fees – such as direct debit fees and establishment fees – that can make a major impact on the cost of a loan. For instance, two loans can have the same interest rate but one has hidden fees. Looking at the interest rate alone, you could recommend the higher cost loan to your client. SMART Box™ prevents this by standardising pricing disclosure to ensure that you can make an accurate comparison between business loans.
Why SMART Box™?
The Australian Small Business and Family Enterprise Ombudsman’s Office released a report in February 2018 about transparency and disclosure in the fintech sector. The report revealed that 47% of fintechs believed that more transparency was needed in SME lending. As a result of the findings, the Australian Finance Industry Association (AFIA) Online Small Business Lenders Code of Practice was developed.
In June 2018, six leading online business lending fintechs, including Moula, signed AFIA’s Code of Lending Practice. As well as agreeing to meet legal and regulatory requirements, the lenders agreed to implement a clear and concise loan summary and contribute to the development of a price comparison document. As a result, SMART Box™ was released in January 2019.
SMART Box™ makes it possible to easily compare pricing of online business loan products using several standardised metrics. The SMART in SMART Box™ stands for ‘Straightforward Metrics Around Rate and Total cost’.
How does SMART Box™ work?
SMART Box™ is a one-page loan disclosure document that includes two separate parts. The first part, at the top of the page, displays the basic loan elements, including the Loan Amount, Disbursement Amount, Total Repayment Amount, the expected Loan Term, and Repayment Frequency.
The second part of the document includes 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, the final section answers whether there are any new fees or a reduction in the Total Payment Amount if the loan is paid off early. Although all the metrics are helpful for comparing loans, the Total Cost of Credit is the most important. This metric includes all fees and charges, and will indicate which lender is offering the lowest costs overall.
SMART Box™ metrics explained
Loan Amount – the total principal, not including interest and fees.
Disbursement Amount – the Loan Amount minus the Origination Fee. If there is no origination fee, the Disbursement Amount is the same as the Loan Amount.
Term – the loan duration and payment intervals (daily, weekly, fortnightly or monthly).
Total Cost of Credit – the amount your client will pay in interest and other fees for the loan (this is assuming that repayments are made according to the loan contract).
Average Monthly Repayment – the Total Repayment Amount divided by the loan term in months. Regardless of whether repayments are required daily, weekly, fortnightly or monthly, the average monthly payment is a common benchmark for assessing the monthly cost of the loan. Avoidable fees, such as default interest rates on overdue amounts, late payment fees, and dishonour fees, are not included in this figure.
Total Interest Percentage (TIP) – Interest Expense as a percentage of the Loan Amount, not including fees.
Annual Percentage Rate (APR) – this is the percentage rate that can be used to calculate the cost of the Loan, taking into account the reducing balance of the Loan Amount, expressed as an annual rate. This does not include fees, so it’s important to look at this metric along 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 instance, if a borrower is lent $20,000 and is required to pay back $24,000 to the lender, including interest and fees, the factor rate would be 1.2.
Early Repayment – this section answers questions on the effects of early repayment, including whether early repayment will result in additional fees and charges, and whether making an early full repayment will reduce the Total Repayment Amount. It should be noted that some lenders don’t charge early repayment fees but still charge all or part of the interest for the entire loan term. Moula does not charge any fees or additional interest when a loan is paid off early. If a loan is repaid early, Moula only charges interest to the end of the fortnight when the balance of the loan was repaid.
Here’s an example of a loan showing the most important metrics disclosed when using SMART Box™.
How is Moula connected to SMART Box™?
Being one of the six original signatories to the Code of Lending Practice, Moula played a significant role in the development of SMART Box™. SMART Box™ boosts transparency and makes it possible for finance brokers to accurately compare the business finance products of Code-compliant lenders. This fits with Moula’s emphasis on transparency and enabling small business owners to make decisions based on accurate information.
Next steps for finance brokers
If you want to get a true comparison of loan costs and help your clients get the most cost-effective business loans, SMART Box™ is a simple solution. Here are ways to ensure that you get the best outcome for your clients:
First, make sure the lenders you are comparing comply with AFIA’s Code of Lending Practice.
Second, ask for the SMART Box™ from Code-compliant lenders. As of January 2019, there were seven compliant lenders, including Moula.
Third, read the SMART Box™ document to compare the cost of each loan, including all fees.