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New ‘FAIR’ – Small Business Lending

Equipment Finance

‘Fair’ Small Business Lending

Those considering Small business lending with the big four banks are set to benefit from changes to contract terms imposed by ASIC and sought by the small business ombudsman.

Small Business Lending

The Australian Securities and Investments Commission (ASIC) has issued recent advice’s indicating that all four of the nation’s major banks have agreed to eliminate unpopular ‘unfair terms’ from their loan contracts to small business.

In the context of small business lending, this means for loans of up to $3 million that are provided in standard form contracts to small businesses employing fewer than 20 staff are covered by the legal protections. It is expected other small business funders will follow.

Changes will include:

  • Removing ‘entire agreement clauses’ from small business contracts. These are concerning terms that absolve the lender from responsibility for conduct, statements or representations they make to borrowers outside of the contract.
  • Removing financial indicator covenants from many applicable small business contracts. For example, loan-to-valuation ratio covenants that give lenders the power to call a default when the value of secured property falls, even where a small business customer has met financial repayments, will be removed.
  • Removing material adverse event clauses from all small business contracts. These are concerning terms that give lenders the power to call a default for an unspecified negative change in the circumstances of the small business customer.
  • Significantly limiting the operation of indemnification clauses. These are concerning terms that aim to broadly protect the lender against losses, costs, liabilities and expenses that arise even outside the control of the small business borrower.
  • Significantly limiting the operation of unilateral variation clauses. In addition to providing applicable small business customers with a minimum of 30 days’ notice for any contract changes, banks will clearly limit the circumstances in which unilateral variations can be made.

The banks have agreed that all customers who entered or renewed contracts from 12 November 2016 – when the protections for small businesses began – will have the benefit of the changes agreed with ASIC.

Despite the date above in many cases, banks have agreed to implement the changes so that they apply to all existing applicable small business customers.

ASIC Deputy Chairman Peter Kell said: “We made it clear that lenders had to significantly improve their lending agreements to small business to ensure they meet the new rules.”

“It is important that the banks have committed to improving
their small business lending contracts. ASIC will be following up with the big four banks – and other lenders – to ensure that small business contracts do not contain unfair terms.”

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