Finance · 22 December 2015

Lobbyists urge parliament to force lenders to publish hidden costs on small business loans

A review on lending to small companies was launched in parliament last weekend
A campaign group working on behalf of small businesses is demanding that lawmakers change the rules for banks and other lenders, forcing the industry to publish annual interest rate percentages on loans to small business.

As part of a review on lending to small companies launched last weekend by a Business, Innovation and Skills select committee in parliament, campaigners hope the government will change laws that currently see small companies taking out loans with annual interest rates of as much as 90 per cent without lenders necessarily having to make the value known.

According to campaigners, smaller firms are less able to fully understand the charges when borrowing, and it is hoped that laws that currently apply to lenders when charging for personal loans, credit cards and mortgages will be applied when charging for business loans.

Jonathan Russell, partner at law firm ReesRussell said that the majority of complaints from small businesses came from charges on asset-based lending, particularly invoice financing. Here, the problem is often that there is an interest rate calculated on the amount borrowed, which is usually competitive, plus a service fee with a base charge often linked to the facility made, he clarified.

often, small businesses see this as a charge for the borrowing and thinks of it as interest, when in fact it should be for providing a service, he added. The problem is that many businesses do not see much for the service and often it is duplicating a cost they already have in house. So it is true that small businesses can end up paying a high cost for their borrowing but in part it is due to their own lack of understanding and failure to ask for the appropriate advice.

Duncan Montgomery, a tax partner with Whittingham Riddell, advised small business owners to seek advice from accountants if in doubt over borrowing.

‘some limit on interest rates would certainly be beneficial, he said. The assumption is often that a small business is financially astute and can distinguish between different loans and packages easily. The truth is that many entrepreneurs are very knowledgable about their products and services but lack a little in dealing with complex financial agreements, just like everyone else.



Fred Heritage was previously deputy editor at Business Advice. He has a BA in politics and international relations from the University of Kent and an MA in international conflict from Kings College London.