The focus in marketplace lending appears to be shifting to small business loans recently and it is clear that small business loans are big business. The European Investment Bank has agreed to make a £100 million investment in small business loans originated through Funding Circle in the UK as part of its priority to improve access to finance for small and medium businesses. In the US marketplace lenders originated around US$1.9B in 2015 up nearly 60% from 2014.
The increased volume of small business loans has not escaped the notice of US federal regulators. There are concerns that sometimes small businesses are essentially individual entrepreneurs and may not have any more tools than consumers to assess the terms of loans offered to them. The US Treasury’s recent white paper, Opportunities and Challenges in Online Marketplace Lending, made a number of recommendations including that more robust small business borrower protections and effective oversight be introduced for online marketplace lenders. A number of regulators including the Consumer Financial Protection Bureau, the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of New York and the Securities and Exchange Commission were contributors to that paper.
Australia has already increased small business loan protections following a recommendation made in the Financial System Inquiry. From 12 November 2016, the existing unfair contract term protections will be extended to Australian small businesses entering into standard form contracts for loans through marketplace lenders. A previous attempt by Treasury to require providers of small business loans to be licenced and comply with responsible lending obligations was deferred in 2013.
With the increased regulatory attention to small business loans we will likely see increased regulation of marketplace lenders in the future.