Small businesses warned about loans
As more small Kiwi businesses fall behind on debt payments they are being reminded to seek advice before applying for loans as the protections under the CCCFA only apply to consumer loans.
Monday, April 8th 2024, 2:04PM
Financial Services Complaints Limited (FSCL), has seen an uptick in business lending complaints from small business owners struggling to repay their loans.
The latest Centrix credit insights report shows business defaults are up 33% year-on-year.
“There is a significant difference between the obligations on lenders when lending to small businesses compared to consumers,” Financial Ombudsman, Susan Taylor says.
“Business loans are not consumer credit contracts and responsible lending obligations do not apply.”
A common issue in some of the complaints the FSCL is seeing is that the lending was allegedly unaffordable, and often a secondary issue is that the borrower considers the lender has not been fair in their response to hardship.
“A business loan carries risk because a lender may have the power to place a caveat on a property (legal notice declaring a specific claim on it), require security over assets including the family home or take personal guarantees,” Taylor says.
While borrowers can apply for hardship assistance when struggling to keep up with a consumer loan – and the lender is legally obligated to consider a hardship application – this is not the same for business loans.
Serious arrears
In a recent case investigated by FSCL, a small business owner took out a $50,000 business loan after securing a new contract for a large organisation on an ongoing basis.
The owner thought it would generate an income of about $200,000 over several months and he needed immediate cash flow to take on new staff and buy another vehicle and supplies. The loan term was for one year and, with $17,000 of interest added upfront, he had $67,000 to repay.
Initially the owner made the payments, however within weeks the loan fell into serious arrears. The lender then placed caveats over two of his properties, including his family home.
With the help of his financial mentor, the owner complained to FSCL. The mentor said the lender hadn’t conducted a suitable assessment of whether the owner could afford to pay the loan.
“Although the lender didn’t have to meet the strict affordability assessment requirements under the CCCFA, it was difficult to see how the lender thought the owner could afford the relatively high weekly repayments of $1,300,” Taylor says.
FSCL’s review of the business’s bank statements showed a regular pattern of the owner receiving payments for completed jobs, but within a few days, the funds were nearly exhausted after paying staff wages and buying supplies.
“We thought the lender should have obtained more detailed information before approving the loan, at the very least the new contract the owner had secured as proof of income, and the business’s financial accounts,” she says.
FSCL helped to negotiate a settlement between the parties where the debt has been reduced. With agreed weekly payments of $385 the loan will be paid off in two and-a-half years and, once the loan is paid, the lender will remove the caveats.
It is in both the lenders and borrower’s interests that loan repayments are affordable allowing the debt to be repaid without difficulty, Taylor says.
“If small business owners are struggling, we suggest they seek the help of a financial mentor, or a business adviser. It is better to have these conversations sooner rather than later. As you run out of time, your options become fewer, debt is often significantly higher and the risk of losing assets, much greater.
“As financial pressures continue due to the current economic environment, we expect to receive more of these types of complaints from small businesses,” Taylor says.
FSCL can take complaints from small businesses (a business with less than 19 employees) about any type of financial service, including credit, finance and loans, insurance, investments, and financial advice.
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