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Small business lending fintech Prospa amends loan terms following ASIC review

Small business lending fintech Prospa has amended its loan terms following a review by the Australian Securities and Investments Commission (ASIC).

Prospa had delayed its planned ASX listing in June in order to respond to queries from ASIC; the listing was originally postponed for 48 hours before being delayed indefinitely as Prospa underwent the review.

It came following a period of focus on unfair contract terms for small business loans. With new legislation having come into effect in November 2016, a report from ASIC and the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) in March 2017 found the four major banks had not taken the necessary steps to comply.

Given a year, ASIC this past March then published Report 565, outlining changes that the big four banks had made to comply, and announced it would be examining the loan terms of other lenders; a survey released by ASBFEO, FinTech Australia, and thebankdoctor.org at the same time found just 50 percent of the fintechs surveyed considered their contracts compliant with the legislation.

With Prospa gearing up for its listing, it was first in line for review.

The changes to Prospa’s loan terms will apply to customers who entered into, or renewed, contracts from mid-November 2016, with the amended contract to come into effect early next month.

Among the key terms amended in Prospa’s standard form small business loan contract is the early repayment clause, now allowing borrowers to repay their loan early without requiring consent from Prospa.

Prospa has also removed its absolute discretion as to whether to provide a discount for prepayment, with the fintech to now apply a published ‘Early Prepayment Policy’, allowing borrowers to see the discounts they can expect if they do pay their loan back early.

Also amended is the ‘unilateral variation clause’, limiting Prospa’s ability to unilaterally vary contracts to specific instances. The fintech has also extended its notice period to 60 days for where it intends to vary fees.

As part of the review, Prospa has also agreed to restrict the borrower’s indemnity to ensure that they are not required to indemnify Prospa for losses or other costs incurred due to the fraud, negligence, or wilful misconduct of Prospa, its employees, officers, agents, contractors, or receivers appointed by Prospa.

Also removed is an ‘entire agreement’ clause, which absolved Prospa from contractual responsibility for conduct, statements, or representations made to borrowers about the loan contract.

Kate Carnell, the the Small Business and Family Enterprise Ombudsman (ASBFEO), welcomed the changes from Prospa and urged other lenders to take note

“ASIC found a significant number of clauses in the fintech’s contract that required changes. The [unfair contract terms] legislation came into effect in November 2016. Small business standard loan contracts can no longer contain terms that cause significant imbalance in rights and obligations, or cause detriment to the small business,” she said.

“The message here is very simple – don’t use unfair contract terms. ASIC has made it clear that it will consider regulatory action. We urge all lenders to small businesses to remove clauses outlined in the ASIC Report 565 from their standard form loan contracts.”

Noting that the changes do not have any material impact on the fintech financially or operationally, Prospa COO Ben Lamb said that as the first non-bank lender to complete its review, Prospa believes the changes are “industry-leading”.

“We specialise in lending to small businesses and we know any changes we can make to ensure access to finance is simple and easy to understand are going to help our customers save precious time so they can focus on growing their businesses,” he said.

Prospa has originated over $500 million in loans since its launch by Beau Bertoli and Greg Mosohl in 2012, serving over 12,000 unique customers. Almost 70 percent of its eligible customers have also taken repeat loans.

The news follows the release of a report from cloud accounting software provider Xero last week that found just eight percent of the small business owners it surveyed who are focused on achieving long-term growth will opt for a business loan.

According to the report, part of the reason why SMB owners are choosing to forgo a business loan is the amount of documentation required, with 80 percent stating it was onerous. More than three quarters of those surveyed said obtaining business loan is difficult for small business.

Over 40 percent of those who have borrowed from a lender said the most difficult part was manually providing the lender with their financials, while 39 percent said the process of applying for a business loan was more stressful than buying a property.

Image: Beau Bertoli and Greg Mosohl. Source. Supplied.





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