SEC, SME Alt-Lenders At Odds Over Proposed Rule

The Securities and Exchange Commission is considering new regulations that alternative lenders say would curb their ability to lend to small businesses.

Reports by Bloomberg on Wednesday (Oct. 26) said the SEC is exploring whether to adopt new rules that aim to safeguard the alternative and shadow banking sector and protect borrowers. According to reports, the SEC is concerned that the influx in funds borrowed via these alternative finance sources could lead to financial trouble down the line for small businesses, upon which the nation’s economic health is so dependent.

The SEC’s proposed rule, first put forth last year, would require business development companies (BDCs), like alternative lenders, to use the total value of revolving credit lines offered to their SME borrowers when calculating indebtedness — and not only the amount those borrowers have actually used from their credit lines.

It would require these lenders to maintain high capital levels to safeguard against potential losses, meaning less cash can be used to finance small business loans, reports explained.

The Small Business Investor Alliance (SBIA) argued that the rules would lead to higher costs for borrowers and smaller financing facilities. Another industry stakeholder, Hercules Capital, similarly spoke out against the proposals.

“If the SEC applied the rule as has been interpreted, there are dire consequences for the BDC industry,” said Hercules Capital Head Manuel Henriquez. “There’s an immediate impact on the capital formation of developing companies. They need to know they have access to capital to hire, to invest, to grow.”

According to Bloomberg, citing the SBIA, BDCs have lent more than $70 billion to small businesses since alternative finance players began filling the gap left by large, traditional banks in the wake of stricter capital and risk requirements imposed upon them.

But some proponents of the rule say that it would more accurately reflect the financial standing of BDCs, as companies can access funds from their credit lines whenever they would like.

“They’ve taken advantage of this idea of helping small businesses grow and this pitch of ‘give us more money because we are a unique source of capital,'” said Rajay Bagaria, money manager at Wasserstein & Co., referencing the rise of BDCs. “The SEC seems to be saying that they need to protect investors and protect the lenders from themselves.”

The SEC declined to comment on the matter to Bloomberg.