Small businesses interest rates fall despite Brexit uncertainty
Funding Xchange is releasing on 7 October the first edition of its “SME Lending Monitor”, which tracks the lending activity of 40 lenders specialising in small business lending. The Monitor will show that borrowing costs for some businesses are dropping. 60% of businesses with a reasonably good credit profile are able to access unsecured loans at a total cost of borrowing below 9.5% per annum. This is below the costs that many High Street banks are charging small businesses for overdrafts.
This also represents a significant fall in the cost of credit for these businesses compared to 2018. The reduction in cost of credit is surprising given fears about the imminent prospects of the economy, and mixed media coverage about the current state of alternative finance.
Whilst this indicates that the alternative finance sector is coming of age, Funding Xchange warns that SME loan applicants should be wary of brokers and platforms adding on fees which can materially increase the cost of borrowing.
Katrin Herrling, co-founder of Funding Xchange, commented
“I am delighted to see that by bringing transparency to the SME lending market, and at no cost to the SME, competition is driving cost of funding down to lower rates for small business borrowers.
As economic conditions are predicted to deteriorate, funding will become a lifeline for many small businesses. As a small business owner, I built Funding Xchange to ensure small business owners can compare offers from bank and non-bank lenders in minutes – enabling business owners to take control of the funding process. We guarantee that Funding Xchange is never more expensive than going direct to a lender.”
Rates for funding have dropped
Funding Xchange, the only marketplace that provides businesses with personalised transparent quotes for business funding, will be issuing the first edition of their SME Lending Monitor on October 7th. The key finding from the first edition is that the borrowing rates of alternative lenders for SMEs are dropping, and in some instances are more competitive than the major banks.
This is the first time that alternative finance solutions for SMEs have become more competitive than bank finance. Businesses with a credit worthy profile accessing short-term unsecured loans (covering an 18-24 month term) with a total cost of borrowing below 9.5% have more than doubled in recent months (since March 2019) to 60% of all applicants. Many businesses who access these low rates from alternative finance lenders have a profile which would ordinarily mean they are turned down from banks for funding.
In some instances, this beats the rates offered by mainstream banks, with this segment of customers typically being offered overdraft facilities with representative APRs of 9.9%.
Why are alternative lenders are becoming more competitive?
Alternative lenders are reducing their rates to become more competitive to win business with a good credit profile.
This is occurring due to a number of different factors including the ability for businesses to shop around for the best deals by using comparison platforms such as Funding Xchange, as well as lenders being able to more accurately assess the business performance of applicants and make credit decisions due to the emergence of live data sources such as Open Banking.
Additionally, competition has been enhanced by the alternative finance landscape maturing. At the established end of the market, there has been significant equity investment and IPO activity, resulting in the need to deliver returns and demonstrate growth to investors.
However, SMEs still need to be wary of getting stung by additional fees
The rates offered by alternative lenders to SMEs are lowering but would be borrowers need to ensure that they are not saddled with additional fees from third-parties.
Unlike Funding Xchange, who do not charge any extra or incremental fees to businesses they connect to lenders, brokers and even some digital platform intermediaries are continuing to charge additional hidden fees to customers.
This opaque practice makes it hard for SMEs to compare the true cost of different financial products, and in some instances increase the cost of credit by 10%.
Whilst there is a case to be made for additional fees being charged for particularly complex and high value solutions, brokers provide little value other than connecting to the lender in most other instances.
Regulatory scrutiny may yet address the issue
Funding Xchange supports tighter regulation of the intermediary sector to ensure small business owners enjoy the same protections as consumers. A deterioration in the economic environment, which typically result in increased activity from SMEs seeking business finance, the FCA may find itself scrutinising the practices that prevent small businesses from getting a fair deal.
