Why Prospa changed its business loan contracts

And what your business needs to know about the changes.

Following a review by the Australian Securities and Investment Commission (ASIC), small business lender Prospa has changed a number of terms in its small business loan contracts that were deemed unfair. This will result in improved terms for both borrowers and guarantors, with all customers that entered into or renewed contracts with Prospa from 12 November 2016 standing to benefit from the changes.

According to Prospa, the lender received a letter from ASIC on 5 June 2018 requesting information as part of a broader industry review of non-bank business lending contract terms. ASIC's focus had so far been on the banks, but Prospa and other non-bank small business lenders operate in a different regulatory environment than banks that offer business loans. This has resulted in different cost structures and contracts. While this has meant finance has been expanded to more businesses through innovative funding models, the non-standardised cost structures and contracts are not the best outcomes for borrowers.

In February 2018, a number of fintech business lenders including Prospa, came together to develop their own code of conduct in an effort to self-regulate the market. The six signatory lenders – Prospa, Capify, GetCapital, Moula, OnDeck and Spotcap – are committed to being compliant with the code by 31 December 2018.

This new review of Prospa's small business lending contract in consultation with ASIC resulted in a number of changes to its small business loan contracts. Prospa's general counsel Nicole Johnschwager said the changes were made as part of Prospa’s commitment to helping lift transparency across the industry.

“This is an evolving area of regulation and we will work with industry peers and stakeholders to support this important and growing industry," she said. “We call on other small business lenders in the industry to engage with ASIC and complete their own reviews and to subscribe to the Code of Lending Practice if they haven’t already.”

Summary of the changes:

Note: Check ASIC's release for the full changes

• Early repayment fee. You can now repay the loan early without requiring Prospa's consent. Prospa will also publish an early repayment policy so you can see what discounts are available if you repay early.
• Loan variations. The "unilateral variation" clause was altered to significantly limit Prospa's ability to alter loan contracts.
• Fee variations. Prospa will need to notify you 60 days in advance when it plans to alter fees.
• Cross-default clause. A clause was removed which allowed Prospa to call a default due to any default under another finance document related to the loan. For example a guarantee.
• Restricting the borrower's indemnity. This is to ensure you're only required to indemnify Prospa, its employees and agents. Also that you're not required to indemnify Prospa for losses or costs incurred due to the fraud, negligence or willful misconduct of Prospa.
• Limiting guarantees. The class of people who can provide guarantees was limited.
• Guarantor changes. There were a number of changes related to guarantor clauses including limiting the guarantor's liability so that they are not liable for any increase in the amount of the loan principal and interest agreed at the start of the loan. Guarantors will also be notified about borrowers who are 30 days behind their payment schedule.
• Late payment fees. ASIC will undertake a further review of how Prospa charges late payment fees.