Responsible lending is a term that can get thrown around in the lending industry—it sounds great and certainly makes financial institutions look good when they use it... But practically speaking, what does it mean? And more importantly, how does it affect you as a business owner?
It matters a lot, actually. If you’re looking for business funding to grow your veteran business, you want to work with lenders who will set you up for success. It’s in your best interest to work with a lender who practices responsible credit reporting, has an alignment of interests and provides you with the right-sized funding so you won’t default on a loan.
If your lender claims to practice responsible lending, here are the top six characteristics you should expect to see in them:
1. They believe in you
When your lender offers you financing, it should be because they have high confidence in your ability to pay back the loan. While it may be frustrating that lenders sometimes offer you a smaller loan amount than you originally requested, they’re almost certainly working with your best interest in mind. If your lender is responsible, you want them to provide you with only the amount you can afford to repay without having to default, re-borrow or refinance.
2. They have similar business interests
Lenders that receive payment directly from your business’s gross sales have a responsibility to verify that you can afford to pay back the loan while remaining profitable. A responsible lender completing due diligence must verify the expected revenues and expenses of your business, through documents and data from third parties, and set up a term structure that meets your needs.
3. They give you right-sized funding
Your lender should give you a loan that works for you, rather than one that will maximize their revenue. Your lender should be more concerned with your success and growth rather than with benefitting themselves—which sometimes means saving you from yourself. If you can’t afford to repay a loan with your current business revenue, your lender has a responsibility to only lend you what you can afford to pay back.
4. They want to build a relationship as a strategic business partner
Building relationships is key when growing your business. This not only applies to creating partnerships with businesses and other small business owners that align with your strategies, but it also applies to your relationships with financial partners. You’re putting your trust in lenders to help you grow your business as they’re putting trust in you to pay back the loans. A lender that takes the time to understand your business from a financial perspective can help you create growth in the long term. A responsible lender will tell you whether you can afford a loan or not. They’re experts in determining your payback ability based on your credit and cash flows. And sometimes that means building the relationship by starting small and testing the waters with each other.
5. They practice responsible credit reporting
When your small business lender lends you money, you should expect them to consult your credit data and report loan repayment information to major credit bureaus. This will enable other lenders to responsibly underwrite you in the future and build your credit profile. Responsible loan reporting can facilitate access to more affordable loans down the road to fill your future needs.
6. They’ve signed the Small Business Borrowers’ Bill of Rights
The way businesses borrow money has been changing since the Dodd-Frank Act that put tighter restrictions on consumer lending. Lenders are innovating as we speak. However, your rights as a business borrower aren’t yet protected by law. Some lenders, brokers and marketplaces have signed the Small Business Borrowers’ Bill of Rights. This agreement has been signed by more than 50 lenders, brokers and marketplaces and states six fundamental financing rights that all small businesses deserve. These include:
- The Right to Transparent Pricing and Terms
- The Right to Non-Abusive Products
- The Right to Responsible Underwriting
- The Right to Fair Treatment from Brokers
- The Right to Inclusive Credit Access
- The Right to Fair Collection Practices
Our Responsible Lending Promise to Small Business Owners
We believe in setting small businesses up for success and believe every lender should, too. We strive to be the most transparent in our lending practices to business owners. As a veteran-run company, we show the same respect for our fellow veterans as we do to the business owners we work with every day. We follow these six principals with each borrower and have signed the Small Business Borrowers’ Bill of Rights.
At StreetShares, we encourage all business owners to know your rights, understand responsible lending and underwriting practices and to seek a lender who values your success. See for yourself and experience the process of working with StreetShares today. If you have been in business for a year or more, are making $25,000 or more in revenue and have a decent credit score, apply for a business loan now.