Would greater lending regulation and transparency benefit SMEs?
Small businesses play a key role, not only in the local economy, but nationally as well. As we recently reported, small businesses are feeling positive about their future growth prospects. This is incredibly important as we move closer to the UK’s deadline for leaving the European Union.
While outlooks and profits might be on the up, the chief executive for Responsible Finance, Jennifer Tankard, writing for PoliticsHome, notes that access to finance remains a challenge for SMEs in the UK.
According to the latest FSB Voice of Small Business Index, there has been a decline in the proportion of small businesses successful in their credit applications.
It is perhaps no surprise, then, that there has been a rise in alternative business lenders since 2008. These organisations offer innovative and specialist financing, such as working capital, asset finance, invoice finance, trade finance, property finance, and merchant finance.
But it can be time-consuming and confusing for small business owners to find the right product on the right terms, Tankard explains.
To make matters worse, these business lenders are not regulated and they lack transparency around their offers. This means SMEs could end up choosing finance products without fully understanding what they’ve signed up for, that can become more expensive than they thought, and have conditions that could turn a minor cash flow problem into a full-scale crisis.
For the vast majority of SMEs and micro-enterprises, there isn’t a qualified finance director. Instead, the owner and directors are responsible for funding. This lack of professional knowledge can put them at a disadvantage.
What’s more, lending to SMEs often requires personal guarantees, meaning business owners are personally liable. Inappropriate lending can, therefore, be catastrophic with repercussions leading to a loss of business, jobs and, in extreme cases, the loss of the family home.
Due to a lack of regulation, lenders don’t have to be transparent about fees and charges, they don’t have to show the cost of borrowing in any specific way, and they don’t have to undertake an assessment of affordability. SME owners can end up taking on more finance than they can manage or afford, and they can be unable to determine the total cost of the loan.
To ensure that small businesses continue to play their critical role in economic growth, job creation, and employment, all business lenders need to be more transparent and have greater and more consistent regulation.
Tankard argues that lenders should:
● Clearly display the cost of credit by being honest about the total cost of borrowing on representative examples of APR, charges on arrears, and missed payments
● Mirror consumer lending contracts when explaining loan contracts and information
● Provide small business owners with support in building financial capability skills
Small businesses owners can really benefit from getting expert financial advice, both for their company and in their personal life. To get connected with SMEs requiring such expert advice, speak to Outbound Solutions.