[Editor’s note: This is a blog post from Andrea Gellert, chief marketing officer at OnDeck. OnDeck is a Platinum Sponsor at LendIt USA 2017 which will take place on March 6-7, 2017 in New York City.]
I believe small businesses are in a better position today to access the capital they need to fuel growth and otherwise meet the challenges they face to grow than ever before. The world of small business financing has expanded and become more inclusive as online lenders make capital available to many healthy businesses that, for one reason or another, would otherwise be excluded from the traditional small business loan process.
This new paradigm for small business lending has changed the way many small businesses access capital, but it requires the business owners to be savvier in how they approach borrowing and requires them to understand more about the process than previous business owners who simply needed to visit the bank and complete an application.
Our industry has successfully created new credit models that enable more businesses to qualify for financing. We’ve leveraged technology to access data, to see the metrics that identify a creditworthy business beyond only the owner’s personal credit score. We’ve streamlined the application process making it possible to approve (or decline) a loan application in as little as a few minutes. And, we’re able to deposit the loan proceeds into their business bank accounts within a day or two.
Doing this has turned traditional small business lending on its head. I think this is a wonderful thing for our customers as we gain more traction in the marketplace and it’s been interesting to watch how traditional lenders have responded to the new paradigm. Some banks are scrambling to build a better internal solution to meet their customers’ needs. Others, recognizing that the way they do business hasn’t really changed much in recent years, see the value of partnering with technology platforms to make a small business loan more accessible to a greater number of their clients. Our successful partnership with JP Morgan Chase is a good example of the partnership approach.
With all of this new ability for small businesses to access capital, there have been some challenges and questions that the industry needs to address. For example, given significant differences in the ways that different companies explain their product costs and pricing structures, it can be challenging for a business to assess and compare different loan products, loans of different terms, and other costs expressed in different ways.
There are a lot of reasons why costs, rates, terms, and fees are expressed differently, but we don’t think this broad variation serves our small business customers, but rather it creates the perception of confusion in the marketplace, and enables our industry detractors to disparage what we’re doing and misrepresent why we’re doing it. That said, we don’t think there’s any single metric to express the costs associated with the wide array of potential loan products, but we do believe there is a way to express key pricing information in plain English so borrowers can better understand different loans or different loan types.
In May of last year, OnDeck helped launch an initiative of the three largest online small business lenders, and a leading national non-profit microfinance trade association (the Association for Enterprise Opportunity (AEO)), to produce a disclosure solution that would help standardize a common set of pricing metrics and make it easier for small business borrowers to assess their options. The initiative – developed through the Innovation Lending Platform Association (ILPA) – resulted in the creation of the SMART Box™ (“Straightforward Metrics Around Rate and Total” cost), an easy-to-read standardized disclosure that uses common verbiage, explanations, and calculations around a comprehensive set of pricing metrics.
The SMART Box isn’t intended to replace a company’s current loan disclosure information or documentation, but rather is intended as a supplemental disclosure that identifies key pricing information in easy-to-understand language. The SMART Box offers a disclosure approach that will make it possible for a small business to assess different loan products and determine the right fit for the business’ need or use case.
What are the SMART Box Metrics?
In addition to some pretty basic considerations like amount borrowed, payment frequency and amount, and the term of the loan, the SMART Box metrics include:
- Total Cost of Capital (TCC): This metric will include any interest or other fees that are a condition of receiving capital.
- Annualized Percentage Rate (APR): Navigant Consulting will check that the methodology for calculating APR used by a SMART Box adopter conforms with one of the methodologies allowed by Regulation Z (implementing the Truth in Lending Act).
- The Average Monthly Payment: Regardless of whether the periodic payment is daily, weekly, or monthly, the average monthly payment provides a common benchmark for evaluating monthly cost and cash flow impact.
- Cents on the Dollar: This metric is exclusive of all other fees to allow for comparison with other common pricing metrics in commercial financing, including the factor rate, simple interest, and total interest percentage.
- Prepayment Policies: This is intended to make any applicable prepayment policy readily transparent to the borrower.
The SMART Box disclosure assumes that the financing option will be repaid in its entirety according to the terms of the applicable agreement and that no payments will be missed.
I believe this is a good thing for small businesses. It offers borrowers enhanced transparency to assess and compare loan options and make an informed decision. This initiative is the first time leading small business lenders have collaborated on a standardized way to make small business lending even more transparent. I also believe that this type of disclosure approach is good for our industry, and we welcome other providers to voluntarily adopt the SMART Box model disclosure in order to better serve their customers.
You can visit the Innovative Lending Platform Association to learn more about the SMART Box initiative, and contact the ILPA if you are interested in learning more information on how to adopt the SMART Box disclosure.