OnDeck (NYSE:ONDK), CAN Capital and Kabbage, have joined together to launch a loan comparison tool to help small businesses better compare finance options. As part of their participation in the Innovative Lending Platform Association (ILPA), the three online lenders have created “Straightforward Metrics Around Rate and Total cost Box or SMART Box. The ILPA also partnered with the Association for Enterprise Opportunity (AEO) on the project.
This new application was described as a “priority initiative for the ILPA. The application was developed in response to a demand for a common terminology and standardization so SMEs looking to borrow money can easily compare offers with similar terms including Annualized Percentage Rate (APR) and Total Cost of Capital (TCC). The loan comparison tool was said to be the culmination of many months of consultation with small business stakeholders including policymakers, non-profit organizations, small business owners and other SME advocates. The ultimate goal was to enable an apples-to-apples comparisons of different finance options.
The Small Business & Entrepreneurship Council (SBE Council) released a statement in support of the SMART Box product;
“Finding funding to start or grow your business can be an onerous challenge for small business owners. The growth of online lending platforms has provided small businesses with access to many more options in this tight lending climate,” stated Kristie Arslan, Small Business & Entrepreneurship Council’s entrepreneur-in-residence. “As a small business owner, allowing the vital information of a funding opportunity, such as the monthly payments, total repayment amount, cost of capital, fees, and much more, to be pulled out of the fine print and presented with the SMART Box tool will greatly help me and other business owners compare options and make the best funding choice for our businesses.”
Noah Breslow, CEO of OnDeck, said they were 100% focused on serving small business responsibly.
“It is our belief that the SMART Box will become the national model for small business lending disclosure.”
Kathryn Petralia, co-founder and President of Kabbage, said the SMART Box was the “next step in advancing transparency within lending.
“We’re confident it will enable small businesses everywhere to make informed decisions that can drive new levels of success.”
The SMART Box initiative may successfully address a nagging criticism of the SME online lending industry that business owners are confused by inconsistent terms and actual costs of borrowing. There have been rumblings inside the beltway about a more proactive regulatory approach to certain classes of online lending and this product may mollify government officials.
According to the ILPA, there are three versions of the SMART Box disclosure for term loans, lines of credit, and merchant cash advances. Each version takes into account the differences between the products, while still utilizing common pricing metrics and calculations, as well as standardized language.
The SMART Box disclosure features include:
- The basic elements of the finance option under consideration, including: the amount financed, the funds disbursed, the total repayment amount, the expected term, and the frequency of payback (as applicable).
- Four common pricing metrics, including TCC, APR (estimated for merchant cash advances), the average monthly payback, and the cents on the dollar cost of the financing option.
- The TCC metric captures all interest and any other fees that are a condition of receiving capital. This metric states the total dollar cost of the finance option, a crucial source of information for a small business owner.
- The APR metric provides the cost of capital—including fees that are a condition of receiving capital, when applicable—expressed as a yearly rate. Note that while APR can be used for comparison purposes, it is not the interest rate applied or used to calculate the total dollar cost of the financing option. Navigant Consulting will be responsible for validating that APR calculation methodologies are consistent with the principles of Regulation Z (implementing The Truth in Lending Act.
- The average monthly payment metric captures the average monthly cash flow impact of repaying the finance option under consideration. Regardless of whether the product requires daily, weekly, or monthly repayment, the average monthly payment provides a common benchmark for assessing monthly cost.
- The cents on the dollar metric captures the amount of interest (or Loan Fees, as applicable) paid per dollar borrowed. This metric is exclusive of all other fees to allow for comparison with other common pricing metrics in commercial finance, including the factor rate, simple interest, and total interest percentage.