Thousands of SMEs ‘trapped’ in dodgy loans

Dr Craig Latham, Deputy Australian Small Business and Family Enterprise Ombudsman (ASBFEO), has warned about the rising number of businesses being impacted by improper financial agreements.

3 June 2022 

Dr Latham said his office received over 7,000 requests for assistance each year with some of the most difficult cases involving SMEs “trapped” in arrangements that no longer work.

These included arrangements for business equipment like multifunction printers where equipment was provided alongside a financial agreement with a third-party financier.

“Small businesses are often unaware that they are actually entering both an equipment lease/purchase and a finance agreement,” Dr Latham said.“We have seen these creating problems for small businesses when equipment becomes defunct or is otherwise no longer needed. The problem for businesses is that the obligations under the financing contract persist – and these can be very onerous.”

Dr Latham said avoiding these types of arrangements altogether would be the best solution and accountants or other trusted advisers could help.

“That’s because once entered into, they are difficult to renegotiate, and raise issues like hardship,” he said.

Where accountants have SME clients with arrangements like this, Dr Latham suggested they tackle it by refinancing elsewhere and “pay out the contract”.

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The benefit of this approach was dependent on the terms of the contract (which is commonly one-sided) and the willingness of the finance company to terminate the contract.

According to Dr Latham, ASBFEO has also fielded inquiries from small businesses with high interest and penalty financial arrangements with financiers that are not members of the Australian Financial Complaints Authority (AFCA).

While there are established channels via AFCA to address disputes where a financier is a member of AFCA, these are not available for family and small businesses that enter into financial arrangements with non-AFCA members.

“The contracts will commonly fail to provide dispute resolution mechanisms outside the formal court system,” he said.

As such, Dr Latham urged SMEs to secure finance from firms that are AFCA members.

“This means that should an issue arise, there is an established process to help resolve it and that help is backed by AFCA working with the parties,” he said. 

“We are keenly interested in more commercial finance companies stepping up and becoming members of AFCA. From 1 July, AFCA introduces lower fees that cover the cost of five disputes annually (should they arise).

“There really is no excuse now for commercial finance companies failing to be members of AFCA.”

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