Let's face it: many alternative small business lenders, funders and brokers have developed a bad reputation. Widely used labels such as "dishonest" and "predatory" are putting the industry at risk. Why is it that a $17,000 Apple Watch is considered an achievement but a higher cost alternative loan is seen as inherently evil? This is the world we live in, whether we want to acknowledge it or not.
It should be no surprise that the calls for oversight and regulation are increasing. Back in January, Chicago Mayor Rahm Emanuel publicly called for increased state and federal regulation of alternative small business lenders to protect small business owners from predatory lending practices. No matter how "different" any one may believe they are, bad actors can create a negative perception of the entire industry. The actions of a few can be damaging for all.
The good news is that a solution isn't that far off. Industry collaboration and self-regulation through best practices can draw a clear distinction between "good" and "bad" actors. There are success stories from the equipment leasing and consumer lending industries of productive and successful dialogues leading to education about best practices with government agencies. We are not starting from scratch.
The bad news is that it will not be easy. The need for industry collaboration is urgent and working together to self-regulate is necessary as it will level the playing field and minimize outside oversight. Competing products, business models and target markets make collaboration a challenge. We hear many objections from all corners of the industry: prime or near-prime alternative lenders don't want to be associated with sub-prime lenders; business lenders don't want to be associated with consumer lenders; or the belief that the industry in general will always be exempt from further oversight because we participate in a commercial transaction between two businesses.
Collaborating will not be cheap either. It takes a significant amount of funding to facilitate meetings, communicate with lawmakers and government agencies, maintain and enforce best practices, and promote the industry through PR or marketing in the face of media hyperbole and ignorance. But what is the cost of NOT doing something?
What might topics for industry collaboration be?
Transparency
Transparency is essential to the long-term health of our industry, but is the hardest topic to develop a consensus around because of the sheer variety of products and legal structures offered by alternative business lenders. What might transparency mean?
Should disclosure of rates and fees be standardized in some way? Is showing the cost as a fee and total payback amount less transparent than showing an APR as some industry commentators would argue? I'm not sure about that; however, what I am sure about is that the industry needs to minimize customer confusion and deception when it comes to rates and fees. Customers need to know exactly what they're dealing with.
Should broker or intermediary compensation be disclosed to the end customer?
How do we respect the fact that a full personal repayment guarantee is a very different "cost" to a business owner who ends up defaulting on their obligation compared to a product that does not carry personal repayment guarantees?
Should personal liability be disclosed in a standardized way?
Can we make progress as an industry on any aspects of transparency before someone else tells us what we have to do?
Information Security and Privacy
As an industry, how damaging would a high profile data breach involving tens or hundreds of thousands of small business owners' personal and business data be? Data security should be a priority. As so many industries already have best practices in place to protect customer information, non-traditional lenders should not have too much trouble implementing protections. The amount of personal and business information floating around unencrypted or not secured at all is a disaster waiting to happen.
Advertising and Marketing Claims
False and misleading claims are not unique to the alternative lending industry, but they certainly get the attention of the Federal Trade Commission (FTC). The industry as a whole should agree that no one benefits in the long run from bogus claims.
Brokers, Referral and Lead Providers
This code of ethics and excellence should not be limited to the industry players, but those they play with too. What are the minimum standards or expectations for outside partners?
This dialogue needs to happen soon for alternative lenders to get ahead of potential changes and champion workable solutions. By working together, the industry can set its own agenda for self-regulation and oversight, rather than waiting for others to do it in the near future.