Small Business Finance Association lays out guidelines

In mid-April the Small Business Finance Association released a set of best practices for the alternative finance industry. The new guidelines provide essential steps in four key areas industry members should adopt to best serve small business customers.

Stephen Denis, former Deputy Staff Director of the House Committee on Small Business, was hired by the SBFA in December 2015. As Executive Director, he will oversee the creation of a unified voice to advocate for this vital small business lending source. In addition to developing best practices, Denis, who has 12 years' policy experience, is also advocating on behalf of the SBFA's alternative finance technology company members.

During his tenure with government, Denis witnessed first hand how the collapse of traditional lending sources can impact small businesses. "We were here every day with small business constituents from around the country, and the number one issue that was always brought up to us was the lack of capital out there for small businesses," Denis said. "It's really tough for a small business to go and get a smaller dollar loan."

He noted that traditional bank loans are down approximately 20 percent since 2008, and that because many traditional lenders have abandoned small business loans, alternative finance providers have emerged to fill the gap.

First order of business

To encourage small businesses to obtain financing from reputable companies, the SBFA best practices are posted online in a document titled Small Business Finance Principles. Following is a summary of the four guiding principles.

1. Transparency: Alternative finance providers must disclose the fees and dollar amounts associated with all aspects of loan funding and loan transactions in clearly stated documentation that is signed by small businesses.
2. Responsibility: Alternative finance providers must fully asses the affordability of the product being offered during the underwriting process; deal with account defaults fairly; and adhere to terms of the agreement and any applicable local, state and federal laws.
3. Fairness: Alternative finance providers must be truthful and fair in dealing with small businesses in terms of marketing and sales practices, client treatment and complaint processing, as well as offer the ability to cancel the transaction and return all funds without penalty for a limited time after funding (three to five days).
4. Security: Alternative finance providers must adhere to rigorous privacy standards regarding sharing of data under applicable laws and implement robust underwriting procedures to verify the identity and ownership of the entity receiving financing.

Lobbying for small businesses

As an advocate for small business access to finance products, Denis recently testified at the state level pertaining to a bill that would have introduced additional compliance requirements.

"It was a pretty complex bill, 14 or 15 pages of regulations for the industry, creating licensing and various legal components the industry would have to comply with and make it really difficult for our companies to operate in the state of Illinois, " Denis said. "We think there are some things in the bill that were positive."

At this point, reaching out to policymakers to ensure over-regulation does not erode the alternative finance market, as happened with banks and credit unions, will be an ongoing challenge for the SBFA. Denis expressed concern that some policymakers are looking to regulate small business loans similarly to consumer loans, which are structured differently, so more education will be needed.

"SBFA understands that small businesses take big risks to succeed," said David Goldin, SBFA President and Chief Executive Officer of Capify. "We want to be a resource in their success by providing transparent capital solutions that they can trust."

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