#APR4SMEs – understanding the numbers

The recent measures proposed by the CMA have been welcomed by the #APR4SMEs campaign, but it insists that more must be done.

James Sherwin-Smith, CEO of alternative business overdraft provider Growth Street, the company which started the campaign, said that the report by the CMA is an important first victory for the #APR4SMEs campaign started by Growth Street to make the disclosure of APR a mandatory requirement on all forms of commercial finance targeted at SMEs.

“However, the narrow scope of the CMA recommendation on APR is a source of disappointment, as it only covers small, unsecured loans. Therefore it continues to be the case that most finance products used by SMEs do not carry an APR, restricting firms’ ability to shop around and get the best deal, and allowing providers to hide the finance cost businesses ultimately pay via product complexity and related T&Cs.”

Sherwin-Smith argues that a lack of transparent APRs restricts business profitability, job creation and economic growth. However, Funding Invoice CEO Aamar Aslam disagrees, arguing that APRs are not always the most effective measure of affordability.

Aslam argues that APR is not always the best measure for comparing finance, and that different types of finance should be weighed against each other on different metrics.

He explains: “If somebody is borrowing against an invoice with us and it costs them 2% for a month and they only use us once, the total cost over the cost of that year is 2% because they’re not using us every month, whereas the APR on that is 24% so it looks like we’re really expensive.

“APR4SMEs is great – I’m very supportive of it when it comes to term loans and alternative providers providing the rates they’ll be charging over a year or two-year or five-year loan, but when it comes to people looking for just very short-term finance APR definitely isn’t the best metric to be looking at.”

Summing up, Aslam says that what businesses really care about is affordability, and APR for an invoice finance facility may be higher than a loan yet overall more affordable, depending on the company’s requirements. There’s no point having a lower APR if the monthly repayments are higher.