In Part 1 of this series, we discussed P2P consumer lending. Our report noted that P2P is tightly regulated to protect investors and borrowers, and to support a stable P2P marketplace. Peer 2 Business (P2B) lending is slightly different. Investors are usually either sophisticated investors or small businesses as distinct from retail investors, and loans are not regulated by the National Credit Code.
Is an Australian Credit Licence required?
A P2B or commercial lending platform is not required to hold an Australian Credit Licence (ACL) if it is only providing unregulated credit. The commercial lending platform may be able to refer customers through to ACL holders for consumer loans. However, this is likely categorised as ‘being an intermediary’, which is a class of ‘providing credit services’, and requires an ACL, or a representative appointment. There are legal options available if you want to have the ability to generate referral income but don’t want the headache of the consumer lending compliance obligations.
Since the business-lending platform doesn’t require an ACL to conduct commercial lending, there are more methods to structure the P2B lending. For example, each investor could be a direct lender to borrowers through a:
- one to one relationship,
- many to many relationship, or
- combination of these.
Depending on the structure, the platform may need to hold an Australian Financial Services Licence (AFSL) to raise funds. Obtaining an AFSL can be costly and time consuming. You also need the right people involved to demonstrate education and skills. We will discuss AFSLs and alternatives to holding an AFSL in a future series article – stay tuned.
An alternative to a pure financial product fund raising is a hybrid model. The platform may decide to fund through debt equity (borrowing) to begin its business, and then get involved in equity finance once the business is established, and it can prove its performance and record of accomplishment to potential investors.
One of your first activities will be to analyse your proposed business model, possible alternatives, and whether or not a credit or financial services licence is required. If you need an AFSL or ACL, you will need to lodge your licence applications promptly, as obtaining a licence can take many months.
Even though P2B funds are being lent to businesses for a commercial purpose, you are not completely immune from all regulation.
You must still consider the Privacy Act, the AML/CTF Act, how you advertise, you must ensure that you’re not engaging in anti-competitive behaviour such as third line forcing, and you may have other ASIC obligations. In general, most lenders must still act fairly, must not engage in misleading or deceptive conduct, and could be challenged on the basis of contracts being unconscionable. New legislation is currently in the works to protect small businesses from unfair contracts.
The lender should also have a tight credit risk policy, and ensure the it only makes loans to business that are able to repay. If security is not taken, the lenders should be aware of their risk position prior to investing in the B2B.
You should also have an adequate privacy disclosure and consent, especially if you:
- anticipate using a highly sophisticated algorithms that considers individual company director’s personal attributes to assess credit; or
- propose to sell data or metadata as a secondary activity.