What if I told you it was possible for a bank to default on a small business loan, even though the borrower has an impeccable loan history and has made each and every payment like clockwork?
It seems illogical but that has been the reality for some small business owners who have entered into loan contracts with their banks.
During our inquiry into small business loans, we heard heartbreaking accounts from business owners who wound up in dire financial straits, brought about by contract terms that give banks total control.
Basically, banks can make unilateral changes to these complex, onesided contracts at their whim.
Our inquiry heard stories of banks revaluing the assets securing a loan, leading to an unexpected and unmanageable increase in loan costs, and of last-minute decisions not to rollover or refinance a loan.
We also heard accounts of banks unexpectedly demanding customers pay back a portion of the loan in order to reduce the debt, along with reports of banks appointing investigative accountants to review a small business, and billing the borrower for the costs.
The one consistent theme was how surprised the borrower was that banks had so much discretionary power and that, despite diligently adhering to the loan repayment schedule, the banks chose to enforce these powers over them.
Now the banks will tell you that even though these contracts contain such clauses, they don’t use them.
However our inquiry found this not to be true. And even if it was, it begs the question, if banks don’t use them, why include them in contracts at all? Why not get rid of them altogether and simplify the process.
Therein lies the solution: simplified contracts written in plain English will go a long way to balancing the power ledger. Simple contracts that don’t allow banks to default on a loan for reasons outside the small business’ control will help ensure the relationship between borrower and bank is mutually advantageous.
We also found there to be significant gaps in access to justice for small businesses that believe they’ve been aggrieved by their bank. Too often in the past, small businesses have had nowhere to go but the courts, but for a small business already in debt, launching into what would inevitably be a protracted legal stoush with their bank would only be digging themselves a certain financial grave.
Banks need to muster the willingness to adequately address counterproductive lending practices to ensure our vital small business sector reaches its full potential.
Kate Carnell AO is the Australian Small Business and Family Enterprise Ombudsman