The last few months have seen each of the software providers talk about the integration of Banks and Lending providers into the software.
In general we may have entered a world where it is far more efficient and simple to obtain finance for your business. The easier access to data should expedite the process and remove form filling as well as tedious bank manager interviews.
While the process is becoming easier, advisors need to be conscious of the professional, ethical and legal implications.
If anybody were to get a clip of the ticket from a lender because they helped a business borrow money, either as a referral fee or a monthly commission, then that advisor has put themselves in the firing line. They can be challenged about why they referred the business to borrow funds and why they recommended a particular lender.
Disclosure of commissions is absolutely required in all senses of the word by everyone involved. If a software vendor is taking a clip then they need to disclose that. If the Advisors (bookkeepers, accountants or anybody) is assisting or encouraging a business to borrow funds then that Advisor has a professional obligation to disclose.
Many Advisors will have a legal obligation to disclose, let alone the overwhelming ethical obligation.
In practice what it means is:
- a link between the Lender (the Bank or other), who is in the business of loaning money, connecting to your Business data (the software) through an API or similar.
- The Lender gets restricted access to the business records and runs its own analytics and checking program over the data to make a risk assessment.
- Based on that assessment it offers an amount of cash for a period of time at a determined interest rate.
- The connection might be initiated by the Business itself, depending on how the software has established the link, or the introduction might be by the Bookkeeper or Accountant.
- Typically the Lender is providing an introduction referral fee to both the software provider and the Bookkeeper or Accountant.
There are four things Advisors should be aware of.
1. Disclose, disclose, disclose
Anybody that is receiving commission or a referral fee for introducing a lender to a business should be disclosing that fact to the business.
2. Understand the interest
The interest amount (in the short term cashflow lending world interest is sometimes called another name) has to be thought about differently.
The risk rating of such borrowing is going to apply fairly hefty real interest rates. It might make sense for a business to access short-term (two weeks, four weeks, two months) funding to overcome a seasonal or short term cashflow crisis.
That business might deem that the $10,000 it needs for two months is worth the $1,000 “interest”. However do the maths; $1,000 interest for two months would be $6,000 for a year on a borrowing of $10,000. A rate of 60 percent is pretty huge!
The numbers I have used were for simplicity and fairly large, however the example is real and the issue needs to be considered!
3. Short term vs long term finance
When an advisor is involved in arranging business finance there is a professional expectation that the real requirements of the business should be considered. Meeting a longer term finance need with a series of short term cashflow lending solutions can be both very expensive and not the right solution for the business.
4. Be professional
Are you competent to be involved in the financing decisions of the business? The “newer” lenders seem to be most willing to work with you, inform you, train you and therefore ensure that it is they who provide the expert lending advice.
In our view there would be an expectation on any Professional advisors to provide additional information to that provided by one connected lender. What is an alternative lending option? Is the interest rate reasonable? Is it really a short term cashflow crisis or is long-term lending required?
It may be a whole new world of needing to understand a more complete picture about financing business. Just because the software integrates with a lender and the lender says it will lend the money is not a good enough reason to borrow the money.
Similar to what we are now seeing with electricity companies and health insurance, there will be a range of third parties offering comparisons of all the suppliers. I think we are very close to having your software link to a comparison service with a range of providers and you will get a comparison report of several offers of finance.
Image credit: BRW