In Australia, consumer and commercial loans are treated quite differently. If you are new to commercial finance, it is important to know these difference before you sign the documents. Here are a few of those variations to keep in mind.
Interest Rate Disclosure
Consumer loan advertising and documentation must include not only the interest rate but also the Annualised Percentage Rate (APR) which takes into account all the upfront and ongoing fees so the borrower can make a fair comparison between loans. Commercial loan advertising and documentation don’t need to include the interest rate or APR. The difficulty in comparing commercial loans, is one of the main reasons business owners use a broker because they don’t have the time or experience to can analyse hundreds of loans to find them the best deal.
Level of Protection
The difference in protection for borrowers of consumer and commercial loans is significant. The law provides the highest level of protection to consumers borrowing for household purposes such as personal loans, car loans, home loans, credit cards, payday loans and residential investment loans. Borrowers for investments receive a lower level of protection. The Australian government regulates what lenders will disclose to borrowers, how interest is calculated, how the loans are enforced and set limits on default charges.
The lowest level of protection is provided to borrowers of commercial loans, including those to small business owners, companies and business owners. A commercial loan may be needed for the purchase of goods and services, supplies, commercial premises, machinery and running of the business. Commercial borrowers are, however, protected against unconscionable conduct and misleading and deceptive conduct.
Consumer lending is tightly governed by the National Consumer Credit Protection Act 2009. There is a range of regulators designed to look out for the best interests of consumers including the ACCC, APRA and ASIC.
Business loans don’t fall under the NCCP and don’t have the same regulators looking after the interests of business owners. There have been calls for the introduction of the Australian Small Business Borrowers’ Bill of Rights which would lead to a more transparent and accountable small business lending market.
Most loan types for ‘mums and dads’ wanting to buy a home, car, holiday etc are available to the public to research and sign directly with the lender. A large number of commercial loan lenders don’t advertise details of their loans in the public domain and don’t take enquiries from the public. Their loans are only made available through a broker.
When Disputes Occur
Consumers have the regulatory bodies ACCC, APRA and ASIC to assist them in sorting out any disagreement they have with a lender. If the matter continues unresolved, they may have their dispute heard by the Financial Ombudsman Service Limited (FOS) or the Credit and Investments Ombudsman (CIO).
In the case of commercial loans, ASIC believes disputes should be resolved between the lender and business, therefore, it doesn’t make the resources of APRA and ASIC available for businesses to contact in the case of a disagreement with their lender. The assistance of a third party such as a broker is needed to provide the business owner with intermediary force against the lender to settle disputes. Finally, disputes may be heard by the Credit & Investments Ombudsman (CIO) and the Financial Ombudsman Service Australia (FOS) through their External Dispute Resolution scheme.
All loans, whether they be for consumer or commercial purposes, will most probably include the “unilateral variation clause” in the terms and conditions. This clause states that the lender can change any of the terms and conditions at any time without giving notice including an increase in the interest rate charged or the loan can being called in at any time. Businesses are at greater risk of this occurring compared to an individual.
Using a broker allows business owners assistance with the daunting task of finding their ideal commercial loan. A broker can explain the differences in the research, access and regulation of commercial loans. Before signing any business loans, owners should ensure they understand the documentation and if not, ask their broker to explain it further.