The Small Business Finance Association (SBFA) has published a list of “best practices” for the alternative finance industry, coordinating the document with the Lendit conference this week.
The SBFA was formerly named the North American Merchant Advance Association (NAMAA), a non-profit advocacy group that represented merchant cash advance providers. In a statement from 2014, a representative of the association stated;
“NAMAA started primarily as an association of merchant cash advance providers and has evolved into an association for all types of small business alternative financing – particularly those providers of business loans. SBFA will continue to be the leading voice for this industry and we look forward to the association evolving with our industry.”
At the end of 2015, the reconstituted SBFA hired an experienced Hill staffer to lead the charge as the entity focused on adapting to the new reality of online lending.
Today there is a broader push for the online lenders to self-regulate. The Business Borrowers Bill of Rights, announced last year, was perhaps the first push at setting best practices. Last week Lending Club,Prosper and Funding Circle announced the creation of the Marketplace Lending Association with their own set of criteria.
This is an important vector in the evolution of online lending. As the industry grows, it is natural for both appointed and elected officials to review industry practices. The SBFA guidelines are published below.
Small Business Finance Principles
A vibrant small business community depends on access to capital. But that access is also the greatest challenge small businesses face, threatening the very fabric of the American economy.
Members of the Small Business Finance Association, Inc. (“SBFA Companies”) provide critical financial products to small businesses that want to grow, hire, and strengthen the economy.
Small businesses face numerous challenges and take on significant risks to succeed. SBFA Companies want to help them overcome these challenges and achieve that success by offering online alternative financing solutions that are clear, secure, and fair.
The SBFA encourages small businesses to obtain financing solutions from companies that follow the principles outlined below. Verifying finance companies follow these principles will assist the small business in obtaining fair and transparent terms for the capital they need.
Provide transparent information that allows small businesses to make educated financial decisions.
- Disclose all fees, the amount of funds provided, and the total amount owed to the financing provider. For loan transactions, disclose the dollar cost of the loan and for receivables purchase transactions, disclose the discount cost associated with the purchase transaction. These terms should be disclosed in a clear and transparent way in documentation that is signed by the small business.
- Clearly disclose how the funding and repayment process works, the frequency of payments, and the amount of each payment.
- Clearly disclose prepayment policies and if prepayment penalties apply.
Explain the reasons for rejecting an application for funding so the small business can understand what changes it might need to make in order to position itself for financing in the future.
- Provide direct access to customer service representatives that make it easy for small businesses to get detailed and accurate information about their account, the process, and the products offered by the financing provider.
Only provide financing to companies that can reasonably afford the financial product without putting undue strain on the business.
- Fully analyze the business cash flow during the underwriting process to determine whether the small business will likely be able to service all of its outstanding financing obligations without putting undue strain on its finances or operations.
- Require small businesses only use the funds for business purposes.
- Work with small businesses to offer financing options that help put them in the best position to succeed
- When an account defaults, treat the small business fairly and make a good faith effort to resolve the issue in a manner that is professional and respectful.
- Adhere to the terms of the agreement with the small business just as the business must adhere to the terms. Do not unilaterally change payment amounts or dates.
- Cease electronic payments after repeated failures to clear.
- Recognize that loss rates may reflect the value being provided to the small business and track loss rates to verify underwriting practices are not resulting in unacceptably high rates of default.
- Follow policies to verify the funding provides value to the business and does not cause the business to be stuck in a cycle of debt that they are unable to escape.
- Follow policies to verify that, if the small business has other outstanding financing obligations with similar funding sources, either that other financing obligation is paid off at the time of funding from the new financing provider or the other financing obligation is not required to be paid off under the terms of the other funder’s agreement.
- Follow policies and procedures to comply with applicable local, state, and federal laws.
Be truthful and fair in dealings with small businesses.
- Provide marketing materials and promote sales practices that are clear and understandable.
- Monitor marketing and sales practices to ensure a transparent, truthful, and fair process.
- Comply with applicable marketing laws including the federal TCPA.
- Treat every small business equally, determining creditworthiness based on the business case. Never make a credit decision based on race, religion, ethnicity, or sexual orientation and adhere to the applicable requirements of ECOA.
- Ensure that brokers who refer business are aligned with these principles and act accordingly.
- Provide a process for small businesses to file complaints that will be promptly addressed.
- Give each small business the ability to cancel the transaction and return all funds with no penalties for a limited period of time after funding (e.g., 3 to 5 days).
Take seriously the responsibility to protect sensitive information.
- Adhere to rigorous privacy standards that satisfy applicable law.
- Always obtain the proper authorization before sharing data.
- Have robust underwriting procedures in place to verify the identity of the business that is receiving financing (e.g., review bank statements and online presence; discuss business with the operator; confirm physical location; etc.); confirm the individual obligating the small business has the authority to do so (e.g., review appropriate corporate records); and confirm ownership and that the owners are not on the OFAC SDN list.