Fintechs hide sky-high rates for SMEs

Fintech companies are stinging small business with poorly disclosed sky-high rates of up to 115 per cent.

Small Business Ombudsman Kate Carnell. Picture: Darren England.

Fintech companies are stinging small business with poorly disclosed sky-high interest rates of up to 115 per cent, loan documents obtained by The Australian show.

Prospa, which is part-funded by Square Peg, the investment fund founded by Paul Bassat and backed by casino billionaire James Packer, charged one of the highest interest rates among six loans reviewed by The Australian.

The revelations come ahead of a report into lending practices in the sector led by Small Business Ombudsman Kate Carnell, who yesterday slammed some fintech offerings as “misleading” and “too smart by half”.

A draft of the report, obtained by The Australian, calls for the sector to disclose annual percentage rates charged on loans and adopt a code of conduct that would be enforced by the Australian Securities & Investments Commission.

Loan documents and lending websites show disclosure practices and interest rates vary wildly across the burgeoning fintech ­sector.

Rates are bound to be higher because, unlike banks, fintechs do not take security against property.

However, many players do not disclose an annualised percentage rate (APR) to would-be borrowers, ­instead displaying an interest rate across the life of the loan, which can be as short as three months. Others use a so-called “factor rate” — a number, such as 1.1, that when multiplied by the face value of the loan shows the amount of money to paid by the end of the term.

Other practices in the industry include charging the same amount in repayments even if the loan is paid off early.

Some industry players defended the practices, saying APRs were of little use to short-term borrowers and charging a set amount gave small business owners certainty.

According to the draft report, which Ms Carnell prepared in association with FinTech Australia and small business bank expert Neil “The Bank Doctor” Slonim, just 16 per cent of fintech lenders disclose an APR in their loan agreements.

Ms Carnell told The Australian disclosure practices across the industry were “all over the place”.

“You should be able to know what your real percentage is, what your fees are, what happens if you pay back early,” she said.

It was “pretty clear” borrowers needed to be told APRs, she said. And she also took aim at lenders that claim not to have any early repayment penalties, “except what it means is you can pay back the total you were going to in 12 months anyway. Things like that are too smart by half”.

Peer-to-peer lender TruePillars displays an APR in its online loan calculator and discloses interest rates to would-be investors who want to take a stake in the loans it writes.

Founder and chief executive John Baini said some of the examples seen by The Australian revealed “concerning and clearly unacceptable” behaviour.

“There is no doubt that most people think of interest rates in terms of the per annum rate so I absolutely agree that APRs — or comparison rates as they are sometimes known — should always be provided in all advertising and promotions,” he said.

He said he would welcome tighter regulation.

“We already operate under tightly regulated disclosure requirements on the investor side of our business and subscribe to the same standards on the borrower side,” he said.

Loan documents show that one borrower from Prospa, which last week said that in six years of operation it had loaned more than $500 million to 12,000 small businesses, paid an effective APR of more than 115 per cent for a six-month loan of $50,750.

While Prospa boasts on its website that “there are no additional fees for early repayment”, the effective rate was pumped up because the borrower repaid early. If the borrower had paid on time, the APR would have been about 70 per cent.

Prospa co-founder and co-CEO Beau Bertoli said the company did not quote an APR because it was “one of the most confusing formulas architected”.

“It’s actually very, very tricky to work out the cost of capital,” he said.

Instead, disclosing the total amount repayable was “the most transparent way of presenting the total cost of capital to customers,” he said.

His co-CEO, Greg Moshal, said uniform disclosure across the industry would be difficult “because different products have different needs”.

Sail, which also doesn’t quote APRs when making loans, issued a 12-month loan for $55,000 with an effective annual rate of about 45 per cent, loan documents show.

Company founder Yanir Yakutiel defended the practice and said Sail prided itself on “being open and transparent with our customers”.

“This is a very different market from home loans, where comparison rates are used,” he said.

“The abstract notion of an annualised rate is not the best descriptor of the cost as loans are not homogenous and with very different terms.

“The cost of the loan is very clearly stated in both the proposal and the loan documents we communicate to customers, and we specifically designed our documents to highlight the key terms.”

Get Capital, which charged 42 per cent on a $55,000, 12-month loan, said it provided borrowers with both an APR and a life-of-loan rate.

“We’ve got some different pricing based on risk,” chief risk officer David Hurford said.

“Based on risk some would be in the range you are suggesting.”

He said the industry should consider standardised disclosure.

Loan documents show Capify charged one borrower an APR of 85 per cent to borrow $35,000 for a year. The borrower paid back close to $50,000.

At about 16.5 per cent for a three-year loan of $44,220, RateSetter had one of the lowest effective APRs among fintech small business loans reviewed by The Australian. However, once fees and charges of $4220 are included, this rate was almost double the 8.8 per cent quoted in loan documents.

Loan documents for a six-month loan of $175,000 offered by online lender Banjo quoted an interest rate of 6.71 per cent, representing the difference between the amount lent and the $186,740 to be repaid.

However, expressed as an APR this translates to a far higher 23 per cent.

Capify, RateSetter and Banjo could not be reached for comment.