Following on from the Financial Services Royal Commission, the Australian Banking Association issued a revised Banking Code of Practice (Code).
The Code specifies minimum standards of practice and conduct for Banks when providing banking services to the following customers:
- Individual customers
- Small business customers, being those with:
- An annual turnover of <$10m in the previous financial year;
- < 100 FTE employees; and
- <$3m total debt to all credit providers
- A guarantor or prospective guarantor for a loan to an individual or small business customer
What are the positives from the Royal Commission and the Code?
As most of us are aware from media reports surrounding the Royal Commission, there was clearly a need for change.
The revised Code adopted by the Banks provides increased protection to borrowers against unfair contract terms in loan documents. It achieves this by enhancing the protection provided to small business. Specifically, it prohibits a range of potentially unfair and one-sided terms in loan contracts for small business borrowings up to $3 million.
In addition to the Code, Australian consumer law protects small businesses (being those who borrow up to $1 million) from unfair terms in standard form contract terms. Further information can be found here: Unfair contract terms
The Code also provides improved protection for Borrowers and Guarantors, with the Banks now required to clearly stipulate how and when they can take action against a small business customer for non-monetary defaults under loan contracts.
Loan Guarantors are now provided with additional information in the event that a borrower’s financial position is deteriorating as it relates to the guaranteed loan. There is also now a requirement to enforce against a Borrower’s assets first to recover the debt, rather than the Guarantor’s assets.
The above changes are now included in standard form contracts and security documents.
What are the downsides?
We have seen an overall tightening of credit by the Banks, with additional hurdles being placed on small and medium business clients seeking a new loan or renewal of existing facilities. In particular, we are seeing the following behaviour from the Banks:
- Implementation of consumer-type lending requirements, particularly for clients that operate under a trust structure
- Even if the client has adequate cash flow to service the proposed finance amount, directors are being asked to submit a detailed analysis of their personal living expenses, which results in increased paperwork and delays in processing applications. We consider this an unnecessary impost on business
- Any lending proposal that fails to ‘tick all the [Bank’s] boxes’ (to enable approval of the transaction) is generally declined – We are seeing limited opportunities for customers to present to the Banks their logical arguments as to why a transaction should be approved
- Delays in processing Credit Applications – We are seeing delays of up to four weeks from submission of application to the time it is reviewed
- Some clients that are subject to an annual review of their facilities by their Bank are being asked to exit, despite the length of the relationship
What is happening now?
Some of our clients simply cannot obtain finance from their Bank to support business growth, or worse still have been asked to exit their current Bank entirely.
If you are experiencing similar problems, we can introduce you to another Bank, or we can discuss other streamlined Business Finance Options that may be available.
Holiday cash crush
At this time of year, business is preparing to close over the December/January period -and many will effectively utilise the ATO as a short term funder over that period, with payment of the December quarterly BAS not due until 28 February 2020.
From our experience, February typically marks the time when thousands of small businesses are stretching their cash flow to the limit following the holiday period. Now may be the time to consider cash flow over what, for many businesses, will be a tough period of cash payments outstripping cash receipts until normal service resumes in February/March 2020.
With the streamlined Business Finance Options (in summary):
- Cash is available for any worthwhile business purpose; such as marketing expenses, taking advantage of discount terms on stock purchases, injecting cash to support business growth or even hiring additional staff
- Terms of finance from 6 months up to 36 months
- No property security is generally required
- Quick decisions (usually within 48 hours)
We have access to over 15 lenders (covering both Debtor Finance and Business Loans), which means we can generally deliver an outcome based on individual needs.