One SME Lender’s Take On Regulation And Transparency


Though small businesses have suffered from a gap in financing availability post-2008, the demographic continues to shape the financial markets. SME demand for financing led to a rise in alternative and marketplace lenders, for instance. Financial services providers, both traditional and nontraditional, are also exploring ways to meet SMEs’ needs, often described as more sophisticated than consumer banking needs but less so than larger corporates’.

With small businesses considered the backbone, lifeblood and foundation of the national economy, it’s no surprise the lending sphere is experimenting with a few directions on how to serve the segment.

One of these lenders, Clearinghouse Community Development Financial Institution, better known as Clearinghouse CDFI, offers an interesting view into the state of SME finance.

The company takes a more narrow focus to small business lending than some other FIs by targeting the western U.S. in particular, a cross-section of states that CEO Douglas Bystry says has its own unique demands and impacts on regional economies.

That focus provides insights into the direct link between lenders, their SME borrowers and the communities in which those businesses operate.

But Clearinghouse CDFI can also offer interesting insight into the state of regulation of small business lending and how greater oversight may impact the SMEs that prop up their local communities.

Bystry spoke with PYMNTS about what it means for the company to be a certified B Corp and offers his take on where alternative lending players stand in the face of regulation.


A Regional Reach

Focusing on the western states of California, Nevada, Arizona and New Mexico, Clearinghouse CDFI’s Bystry says small businesses in this region have a particular agenda when it comes to their working capital needs.

“We’ve seen a higher level of interest expressed for real estate and construction loans,” he said of the trends he’s witnessed among SME borrowers in the western U.S. “Because real estate in California tends to be expensive and cost-prohibitive, many small businesses do not own real estate. So, there is a real need, and we see this trend line growing.”

The CEO added that some of the borrowing trends seen among SMEs in the area also offer a look into the local economy.

“I think it’s worth noting that, from our perspective, the economic indicators are all looking very positive,” he stated. “Particularly here in Southern California, where the economy is bullish, a lot of small businesses are doing quite well.”

The latest data from Paychex and IHS in their Small Business Jobs Index found a record high in small business hiring activity in June of this year, and while analysts describe the SME climate as “cautious,” they’re also optimistic.

Bystry said that, when it comes to the western U.S., the expansion and hiring plans of SMEs in the area lead to increasing demand for specialized loans.


A Regulatory Touch

While lending practices can offer a measure of small business performance in the U.S., the threat of regulation is headed the way of the alternative finance player. It’s unclear how regulation would impact these FinServ players and their small business customers, but Bystry said that Clearinghouse CDFI’s status as a B Corp means the company has a higher level of transparency in its operations than some other players.

B Corporation certification is handed out by B Lab, a nonprofit that positions itself as a promoter of connectivity between businesses and their local communities. B Corp-certified nonprofits must meet B Lab’s standards for transparency, accountability and social and environmental performance, B Lab explains on its site.

Bystry explained that this certification means Clearinghouse CDFI is transparent in its operations to both its customers and among its employees.

“We’ve made a concerted effort to disclose our finances with our employees,” he said. “We share our revenue numbers, spending decisions and where we anticipate our finances will be in the next three years.”

B Lab is by no means a government regulator and instead — in the case of Clearinghouse CDFI — could be more closely compared to the self-governing efforts of alternative lenders through initiatives like the Coalition for Responsible Business Finance.

But Clearinghouse CDFI is a part of a program by the U.S. Treasury Department that certifies CDFIs to serve underserved parts of the community. As a CDFI, Clearinghouse CDFI is placed outside the ranks of independent alternative lenders and marketplace finance platforms, though it is not necessarily federally regulated like a bank.

The issue of alt-lending regulation tends to circle the concept of transparency, as regulators and borrowers grow increasingly concerned about hidden fees and high interest rates among alternative lending players.

“I would be wary of many alternative lenders, such as credit unions or payday lenders, that aren’t subject to the same regulations [as banks and community development financial institutions],” Bystry stated, “which is when this lack of transparency can become a real risk.”

That lack of transparency, he added, “needs to change.”

“There are countless stories of alternative lenders pushing high interest rates or terms without the borrower’s best interest in mind,” he said. “These moves are designed to maximize profitability, and in many instances, it behooves them to offer somebody credit or a loan without explaining the consequences.”

That can have strong implications for the small business in particular, he said. Considering the impact small business lenders have on the local economy — as Clearinghouse CDFI demonstrates in the western U.S. — Bystry said SMEs need to be extremely cautious, at least until regulation catches up in this space.

“I would warn small businesses not to get wrapped up in payday lending or similar groups,” he said. “Once you’re in that trap, it’s hard to get out of it.”