As alternative lenders continue to develop market share in the small business financing world, questions have arisen around some of their business practices. When you get a loan from these non-bank lenders, are they sufficiently transparent about fees, interest rates, and other pricing details?
To get some insight, alternative finance company Lendio polled 1,000 entrepreneurs about how they approach meeting their financing needs. It found that business owners want information about fees and interest rates presented in a way that will help them understand total costs, rather than as comparatively abstract numbers like an annual percentage rate, or APR.
To get clarity on business owners' preferences, Salt Lake City-based Lendio asked them to imagine they had the opportunity to permanently increase their monthly revenue by $5,000 by taking out a three-month, $20,000 loan. The company then asked them what the easiest way to understand the interest rate and other fees involved with the loan would be--as an APR, a factor rate, or as a total payback amount.
Perhaps unsurprisingly, two-thirds of respondents said they preferred the loan costs presented as a total payback amount. A scant 17 percent said they preferred an APR.
Although an APR is a fairly specific indicator of cost, using it as the sole metric risks confusing some customers, says Brock Blake, Lendio's co-founder and chief executive. That's particularly the case if lenders use APRs for loans of less than a year, and in situations where daily repayment is required, as is frequently the case with alternative lenders.
Blake says that going forward, one solution might be to present options in addition to just the APR, to help business owners really understand the cost of the funds they're borrowing.
Ami Kassar, the founder and CEO of MultiFunding, an online broker of loans to small businesses, disagrees. He says the Lendio survey is somewhat disingenuous, particularly because total payback amounts tend to favor small business lenders who push loans of less than a year. Such loans tend to have APRs that can be exorbitantly high, perhaps in the 80 percent range or more, Kassar says. By presenting the cost as a total payback amount, lenders would be disguising the actual price of the loan.
And with lenders "taking the money from a checking account every day, business owners have less time to use the money, which effectively doubles the costs again," Kassar says.