The Small Business Finance Association (SBFA) has today released a checklist of best practices for the alternative finance industry.
The SBFA, formerly known as the North American Merchant Advance Association (NAMAA), was lauched in 2006, and rebranded as the SBFA in 2015 in order to encompass a broader range of finance providers. The organisation represents a number of technology based lending companies, specifically those catering to small businesses. The not-for-profit organisation is headed up by Executive Director Steve Denis, with Capify CEO David Goldin acting as President. The organisation’s code of conduct is centred upon four key principles: transparency, responsibility, fairness and security. Mr. Denis explained:
“The financial technology industry is creating innovative products every day to meet an underserved need for small businesses. These best practices are our message to the millions of entrepreneurs we serve that no matter how fast the industry changes, transparency, responsibility, fairness, and security are central to everything we do.”
On the transparency front, the focus is very much on enlightening small business customers as to cost and procedure. Clear disclosure of fees, amounts of funding provided, the amount to be repaid, etc. are to be seen as paramount. The repayment process – particularly the amount and frequency of repayments – must also be clearly elucidated.
On responsibility, the goal is to only provide financing to companies that can “reasonably afford” the product on offer, without placing undue strain upon the business. This area includes the need to fully analyse the cash flows of a prospective borrower during the underwriting process, in order to ensure that the business will be able to service all of its outstanding financing obligations after having taken on more debt.
The “Fair” criteria relate to lenders being truthful in their dealings with small businesses, with a particular focus on marketing activities, but also in terms of the way that creditworthiness is assessed. Credit decisions must not be based upon race, religion, ethnicity or sexual orientation and must adhere to applicable requirements of the ECOA.
The most interesting of the best practices outlined within the “Secure” section is the stipulation that members must have robust underwriting procedures in order to verify the identify of the business receiving funds – in order to, amongst other things, mitigate the risk of fraud. Data-sharing within an association like the SBFA can do a great deal of good in this regard.
The complete list of best practices is available here: http://www.sbfassociation.org/small-business-finance-principles.html.
Best practices of this kind are a significant step forwards in shoring up the system of “self-regulation” that by necessity exists within the SME lending space – in part due to a lack (by comparison with the consumer lending sector) of third party oversight.
Doubtless there will be interested parties in the UK, too, given that the formation of an association of alternative business finance is currently under discussion. Indeed, Just Cash Flow PLC CEO John Davies and Liberis boss Paul Mildenstein met today in order to discuss potential membership criteria and operating principles, making the SBFA’s announcement all the more relevant.
“SBFA understands that small businesses take big risks to succeed. We want to be a resource in their success by providing transparent capital solutions that they can trust.”