5 Due Diligence Musts in the Alternative Lending Space

March 16, 2016

By Chelsey Franks
Vice President, Investigations
Bishops Services

Various media outlets have reported recently that the lending business is heating up again – particularly the alternative lending marketplace. (See Business Insider and CNN for just a couple of examples.) Even the Small Business Administration, representing the more traditional side of lending, has recognized the need to branch out and provide more options and products for small business owners.

This is great news for the economy (and for the highly-entrepreneurial millennial generation), but it means potential lenders should take pause and consider their due diligence procedures (or lack thereof) before they jump in with both feet!

Because of the comparatively small size and newness of the alternative lending space, it isn’t subject to the same regulatory burdens as traditional banking and lending – which means your individual due diligence policies are all the more important to fill that gap.

While this is by no means an exhaustive list of what can be covered in a thorough due diligence investigation, see below for the Top 5 boxes you should check in your own vetting procedures:

  1. Are the targets who they claim to be? Have they undergone name changes (either personally or corporately), and if so, do adverse records exist under prior names? Is the company properly registered to conduct business and in good standing with the Secretary of State’s Office?
  2. Has the person or business been sued in recent years? If so, what was the outcome? Do they owe large sums in court fees or settlement amounts?
  3. Has the potential lendee filed for bankruptcy, or do they have a history of tax liens, late payments on their credit report, and other signs of financial instability or duress?
  4. What kind of public reputation does the target have? Is there negative media coverage out there that you should know about?
  5. Are their credentials what they say they are? Is the General Counsel’s Attorney license in good standing? Is the company really small business-certified as they claim to be on their website?

If you’re going to “ride the wave” of alternative lending, strap on your life vest and do your due diligence!

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