As the festive season approaches, Australian small business owners are being urged to exercise extreme caution when seeking finance. While access to capital is often described as the 'oxygen of enterprise', the wrong type of funding can suffocate a business rather than sustain it.
The Growing Threat of Fringe Financiers
New data reveals a disturbing trend in the small business lending landscape. The Australian Financial Complaints Authority (AFCA) reported that complaints from small businesses reached a record 4,648 last financial year, marking a 4% increase from the previous period. More alarmingly, 21% of finance-related complaints could not be processed because the lenders involved were not AFCA members.
Bruce Billson, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), warns that desperate businesses facing cashflow pressures are particularly vulnerable. 'A desperate business is not always the most credit-worthy borrower,' Billson explains. 'Risk-averse established lenders may not be open to this kind of business, but fringe financiers sense the desperation.'
Shocking Real-Life Examples of Predatory Lending
The consequences of dealing with non-AFCA lenders can be devastating. ASBFEO has assisted with cases where a small business borrowed $6,000 from a fringe financier for a few months, only to be chased for nearly $60,000 weeks after the loan period expired.
These predatory lenders often mask breathtaking interest rates by quoting them at a daily rate, which can wash out to 240% per year. Daily late payment fees can start at $100 per day and quickly escalate to as much as $1,000 per day. Some lenders even demand thousands of dollars in fees for loan proposals that businesses wisely reject.
Worrying tactics include substituting non-AFCA lenders into documentation at the last minute when borrowers believed they were dealing with credible institutions. Unexplained moves to lodge caveats over private property and assets are also not uncommon.
How to Protect Your Business
Small businesses have several crucial protections available, but they must take proactive steps:
Before taking out any finance, verify if a lender is an AFCA member by checking AFCA's website through the Financial Firm Search. Look for the AFCA sign as your first line of defence.
Be extremely wary of lenders using aggressive sales tactics or pressuring you to sign quickly. Pause and take time to ask questions, thoroughly review product disclosures, and compare options with your accountant or trusted adviser.
Watch for unrealistic promises - guaranteed approval or no credit checks should ring alarm bells. Look beyond headline interest rates to check fees, penalties, and repayment flexibility. If you don't understand the terms, don't sign them.
For businesses already in trouble, free help is available. The highly valued Small Business Debt Helpline (SBDH) offers free, confidential advice from qualified financial counsellors. They can help navigate options, negotiate with creditors, and regain control.
If your lender is an AFCA member and issues arise, AFCA provides free, fair, and independent dispute resolution. For non-AFCA lending grievances, ASBFEO can seek to facilitate a resolution, though unlike AFCA, they cannot make binding determinations.
Billson's final guidance is clear: 'Use extreme caution with non-AFCA lenders. Running a small business is hard enough without adding unnecessary risk. Before you borrow, pause, check, ask questions, seek advice. And if you're in trouble, reach out for help.'
