What is the true cost to SMEs of business loans?

Alternative lender Fleximize bids to tackle lack of transparency of small business loans with new rate comparison tool.

Commercial finance providers are under no obligation to disclose their annual interest rate or any other comparable rate of funding for business loans

Commercial finance providers are under no obligation to disclose their annual interest rate or any other comparable rate of funding

In light of recent news that small businesses are turning to alternative lenders for their finance, Fleximize has launched a new tool to help UK SMEs get the fairest deal on their business finance loans.

The company’s rate comparison tool allows businesses to instantly compare business loans quotes that are based on a range of different rates.

Because the majority of SME lending in the UK is unregulated, commercial finance providers are not obliged to disclose their annual interest rate or any other comparable rate of funding.

This lack of transparency means SMEs can find it difficult to compare the cost of borrowing from two or more finance providers, especially when they’ve presented their rates in different ways.

Through its own research, Fleximize finds that businesses are accepting quotes based on less conventional rate types – such as yield or factor rate – believing them to be cheaper than quotes based on a monthly interest rate.

With factor rate being displayed as a decimal, typically ranging from 1.1 to 1.5, it can be easy for business owners to misconstrue it as a lower rate. However, the reality is that quotes based on unconventional rates can often be more expensive than those based on a standard interest rate.

For example, using Fleximize’s rate comparison tool, a company could compare the cost of two quotes that are based on 18-month repayment terms.

If the first quote is based on a factor rate of 1.35 and the second quote is based on a monthly interest rate of 3 per cent, they’d discover that the first quote is equivalent to an interest rate of 3.37 per cent, making it more expensive than the second quote.

How does the tool work?

The tool allows business owners to enter the details of a business loan quote, including any mandatory fees, before instantly converting it into other rate types and displaying the total amount repayable.

Peter Tuvey, co-founder and managing partner of Fleximize, says, ‘We believe that business finance should be priced fairly and transparently. With some lenders hiding the cost of their loans behind unconventional rates, business owners can end up paying more than they thought for their funding.

‘We hope that our rate comparison tool will educate business owners about these less conventional rates, and ensure that they get the best possible deal for their business.’

Further reading on business loans

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