A representative of one of the founding companies behind the Innovative Lending Platform Association said their efforts are helping consumers make sense of what can be a confusing sea of lending options.
OnDeck vice president of external affairs and general counsel Daniel Gorfine said OnDeck, Kabbage and Can Capital came together in partnership with with the Association for Enterprise Opportunity to help small business owners make apples to apples comparisons between a variety of products, each with their own merits and situations where they are the best options for customers.
“There are lots for products which serve the needs of small business owners, but all have different characteristics,” Mr. Gorfine explained. “The way they are explained and their pricing metrics presented are done in different ways.”
Early on the ILPA launched a 90-day national engagement period where they met with stakeholders from platforms and advocates to borrowers and trade associations. They knew it was important to provide a basket of metrics allowing borrowers to assess options in different ways without being overwhelmed.
A couple of not-for-profit community lenders suggested the ILPA include average monthly payment metrics.
That became a key component of SMART Box. Standing for Straightforward Metrics Around Rate and Total cost, SMART Box includes clear and consistent pricing metrics, their calculations, and explanations to help small businesses understand the cost of their financing options.
There are three versions of SMART Box disclosure, one each for term loans, lines of credit and merchant cash advances. They account for the differences between those products while employing common pricing metrics and calculations in addition to standardized language.
Each SMART Box disclosure sheet includes basic elements such as financed amount, funds disbursed, total repayment amount, expected term and payback frequency (as applicable). It assumes a loan is paid back in full. Four common pricing metrics are also used:
Total cost of capital (TCC) consolidates all interest and fees which are a condition of receiving capital. It states the option’s total dollar cost.
Annual percentage rate (APR) provides the cost of capital (including applicable fees) as a yearly rate. It is not the applied interest rate, nor is it used to calculate the option’s total dollar cost. External firm Navigant Consulting will ensure APR calculation methodologies are consistent with principles of Regulation Z from the Truth in Lending Act.
Average monthly payment captures the average monthly cash flow impact of repaying a particular option, regardless of whether that option has daily, weekly or monthly options.
Cents on the dollar captures the amount of interest (or Loan Fees as applicable) paid per dollar borrowed. It is exclusive of all other fees to allow for comparison with other pricing metrics in commercial finance such as factor rate, simple interest and total interest percentage.
SMART Box also presents the applicant with two questions regarding the prepayment policy applicable to a specific option:
Will prepayment result in new fees or charges? If yes, there must be a cross-reference to clear and conspicuous disclosure in the lender’s documents describing them.
Will prepayment result in any interest or fee reduction? If yes, SMART Box mandates a cross-reference to a clear and conspicuous disclosure stating the amount.
Finally, each SMART Box disclosure assumes that the finance option will be repaid in its entirety, according to the terms of the applicable agreement, and that no payments will be missed.
Mr. Gorfine said the ILPA is developing a kit for any platform wishing to adopt SMART Box. Interested platforms fill out a form and meet with Navigant Consulting to ensure compliance. They also agree to abide by SMART Box guidelines.
Once in the program, platforms must present the SMART Box in the loan agreement, allowing the small business owner enough time to review it before making a decision.
“We really do think this industry is in its early innings,” Mr. Gorfine said. “The move to standardization and best practices allows the industry to move forward. It’s a display of maturity.”