On October 26, 2017, the Canadian Lenders Association (CLA) and the Innovative Lending Platform Association (ILPA) announced the introduction of the “SMART Box”. The SMART Box is a standardized pricing disclosure and capital comparison tool that will enable Canadian small businesses to better assess and compare their financing options. Rather than having key information scattered across a multi-page loan agreement, the SMART Box pulls all relevant payment details into a single sheet. This is especially important in how it applies to online lending in Canada.
The hope is that the standardized form will make it easier for borrowers to compare different lenders’ rates by factoring in both interest and fees.
A number of non-bank small business lenders, that make up online lending in Canada, have committed to adopt this tool, including: Company Capital, Evolocity Financial Group, IOU Financial, Lendified, Merchant Advance Capital, OnDeck and Thinking Capital. The transparency measures being adopted by these lenders have been core to Lending Loop’s operating policies since inception, and this blog post will look to provide further transparency into the alternative lending space in Canada by:
- Providing an overview of the SMART Box and the features that small businesses should be paying attention to;
- Outlining the types of alternative lenders and alternative lending products currently in the market and the risks associated with each; and,
- Introducing Lending Loop’s new Annual Percentage Rate (“APR”) calculator.
Who is the CLA and what is this new SMART Box?
The Canadian Lenders Association (CLA) supports the growth of companies in the Canadian market that are in the business of lending, or providing other means of credit, to small businesses and individuals by non-conventional or innovative means, such as online lending. The CLA was created to exchange ideas and explore ways of improving the sector, while encouraging potential borrowers to be informed about the appropriateness of innovate lending to the borrowers’ circumstance.
The latter is the driving force behind the CLA’s new SMART Box, which was introduced by the ILPA in the United States in October 2016 in response to a need for common language and standardization in pricing disclosure for small business financing. The SMART Box was developed in consultation with key small business stakeholders, including online lending platforms, policymakers, not-for-profit organizations, small business owners, and small business advocates. Ultimately, the SMART Box streamlines and standardizes pricing disclosures, allowing small business owners to compare loan products on an “apples-to-apples” basis.
The most important disclosures Canadian small businesses should be focusing on in this new SMART Box are related to pricing metrics, especially the Annual Percentage Rate (APR) and the Total Cost of Capital (TCC):
- Annual Percentage Rate: The APR expresses the cost to borrow as an annual percentage of the loan amount. The APR can vary significantly from the quoted interest rate because of various fees associated with the loan, including origination fees and administration fees. As a result, the APR tends to be higher than a loan’s nominal interest rate.
- TCC: The total cost of capital metric captures all interest, loan fees and any other fees that are a condition of receiving a loan. The total cost of capital metric states the total dollar cost of the financing option – a crucial source of information for a small business customer.
Since inception, Lending Loop’s core values have revolved around transparency and democratic access to data. As such, we already present all of our interest rates in the form of an APR and disclose the total cost of capital to all prospective borrowers.
While we applaud this new initiative by the CLA and support any measures taken to increase transparency in the Canadian lending market, we would also like to highlight a few issues that remain in the market despite this new SMART Box initiative:
- Only a select few lenders have joined the SMART Box initiative so far. As a business owner, be sure to ask any alternative lender you are considering borrowing from whether they belong to the CLA and adhere to the SMART Box model.
- The SMART Box requirements only apply to fixed-term loan products. A number of alternative lenders offer additional loan products, including merchant cash advance (MCA) loans and invoice financing. The Canadian SMART Box initiative doesn’t cover other financial products, and we will further explain these alternative products and the risks associated with them later in this blog post.
- The SMART Box disclosures will only be present in loan agreements entered into after October 26, 2017. It is important for Canadian small businesses to understand the true cost of capital they are paying on their current loans. That is why Lending Loop has created a calculator that will allow any small business to calculate the true APR they are paying on an existing loan.
Alternative Lending Options
Considering the SMART Box initiative only applies to fixed-term loan products, small businesses should understand the different alternative lenders and online lending products on the market.
Generally speaking, if you need money quickly, your best bet is to turn to alternative lenders. Small business owners can easily work with new, online lending platforms to access a variety of business financing – from term loans and lines of credit to invoice financing and MCA loans.
According to a study by Harvard Business School, most major alternative lenders offer full loan applications online over desktop or mobile platforms and take just 30 minutes to complete. Meanwhile, applying for bank financing can take an average of 25 hours for a single loan, and that’s not even accounting for the additional weeks (often months) it takes to hear back from the bank.
Additionally, big banks have only approved between 13% and 20% of all loan applications over the past five years, whereas alternative lenders have accepted on average between 61% and 64% of small business owners looking for funding. So, not only are alternative lenders faster, they also accept a broader range of businesses.
Term Loan Products
Term loans are designed to be a flexible financial tool that allows borrowers to better manage their cash flow through a predictable payment schedule. Term loan products allow small businesses to pay back the money, plus interest, with daily, weekly or monthly payments.
Note: All of Lending Loops loans are quoted using the APR, are repayable in monthly installments and allow for early repayment without any additional fees.
Merchant Cash Advances
A merchant cash advance is a lump sum of capital you repay using a portion of your daily credit card transactions. MCAs are often provided through online lending companies and repayment is automatically deducted each day through your merchant account. MCAs are one of the most expensive alternative lending products on the market, so it is important to translate the cost into an APR to truly understand the cost of borrowing.
Invoice Financing / Factoring
Also known as “accounts receivable financing,” this option lets you get paid for your outstanding invoices right away – for a fee. With invoice financing, you could get a fast advance of about 80-85% of the value of your invoices, with most of the other 15% paid to you later. When the client actually pays the invoice, you will get the full invoiced amount back minus a factoring fee, which is usually 0.5% – 4% per month.
Lending Loop’s APR Calculator
The team at Lending Loop has added a new feature to the website that allows for small businesses to calculate the APR of their Term Loan, MCA Loan or Invoice Financing. The way interest is charged and the fee structures associated with these products are all very different, and this tool will allow for Canadian small businesses to compare any loan offer “apples-to-apples”.
Our APR calculator can be found at: https://www.lendingloop.ca/business-comparison-calculator
More details on the SMART Box can be found at: http://innovativelending.org/smart-box/