For small business owners trying to navigate the difficult lay of the ‘lend’, responsible lending becomes a really big issue. You’re probably weary of what is termed as ‘predatory lending’ – where lenders prey on desperation and lack of options. This type of lending is often characterized by unfair and non-negotiable terms, or even out-right fraudulent ones. But most people can spot a shark when they see one, right? Well maybe not. A recent inquest by ASIC uncovered that irresponsible lending is a lot more subtle than you think. By either creeping into contracts or sitting in the fine print of outdated ones (for example). So small businesses in Australia need to take stock and understand exactly what they are getting (and have gotten) themselves into. As a registered alternative lender, we have outlined the need-to-know when it comes to responsible lending.
Responsible Lending & The Law
With the Royal Commission’s recent inquiries into responsible lending practices, all eyes are on both formal and alternative sectors. Let’s first take a look at what the law says when it comes to B2B lending. Firstly this refers to contracts where at least one party is a “small business” with up to 20 employees (including casuals). The scenario goes a little like this: Contracts were signed and the small business accepted the terms. End of story. Well, actually no. As of the 12th November 2016, there have been major developments in B2B contract regulation. Meaning that even if the contract was considered okay then, this may not be the case now. Which means that should the contract be flawed in the fairness department, then it could be nullified in court. Leading to potential PR fall out and lost customers.
Lending terms are considered ‘unfair’ under the following conditions:
Take it or Leave it
Firstly if they present a take it or leave it to approach, our advice is to leave it. Rather find an alternative lender who is able to adjust their terms to fit your unique circumstances and means. This is a cornerstone of responsible lending practice. As an example, let’s use Beyond Merchant Capital Merchant Financing. Firstly we strategically align repayments with EFTPOS transaction history. So repayments automatically adjust to cash flow (which is great for seasonal turnover). Our duty is to ensure that the percentage ‘held back’ from each transaction is both fair and manageable. So when we enter into a contract with a business owner, we carefully survey recent EFTPOS statements. This allows us to ascertain a realistic repayment percentage that will help rather than hinder repayments.
Checks and Balances
Check if your contract was entered into or renewed on or after 12 November 2016. If it was done before, have a legal representative double check that the contract lines up with the new standards and guidelines. If not, it is well within your right to challenge your financial partner.
According to fair practice guidelines, contracts are only considered fair up to a maximum upfront price payable of $300,000 (for contracts less than 12 months) or maximum $1 million (for contracts longer than 12 months). This upfront payable price includes all of the amounts disclosed prior to entering the contract that the paying party will have to pay for the duration of the contract. A key aspect which is considered “fair” within the “upfront price payable costs” are payments calculated as a percentage of an “unknown future amount”. Like a commission or percentage of future sales. The latter is where we come in. Our repayment system works with future card transactions. With this in mind, our clients can rest assured that, for this reason, our working capital T’s and C’s fall within what is considered fair and just practice.
It is really crucial that you understand exactly what fees are included in your deal. These are often hidden in the fine print or payable under certain conditions. Make sure you understand exactly what may be asked of you within every circumstance of your contract. Further to this and most importantly, Beyond Merchant Capital has one transparent fee. This factor fee is included in the small percentage of each future card transaction that will be ‘held back’ until the amount is fully paid off. There are no other hidden charges whatsoever. Rendering our agreement not only fair but out-of-the-ordinary in the alternative lending space.
5 More Red Flags
Here are a few more red flags to keep an eye out for:
- Look out for any terms you feel might be detrimental to your business.
- Be wary of an overwhelming imbalance of power like unilateral decision making or one-sided penalties.
- Is the contract jargon overly technical? This may be designed to overwhelm and confuse matters.
- Question unreasonable automatic renewal clauses.
- And finally, don’t ignore your instinct. If you feel like your existing lending contract is worrying on any of these levels, do your due diligence and raise concerns before signing.
At the end of the day, lenders are service providers. Meaning they need you as much as you need them. It is your right to ensure you are borrowing against structures that are fair, with your best interests at heart. So if you are in need of alternative lending that you can trust, be sure to contact our team of lending specialists. You’ll discover our Merchant Financing and Unsecured Business Loans are highly flexible and fair.
Speak with a lending specialist today about funding the growth of your business.