NSW Credit Law

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Commercial Loan, or not?

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Commercial Loan, or not?

Commercial Loan v Consumer Loan

 

In Australia, commercial loans and consumer loans are two distinct types of financial arrangements, each designed for different purposes and regulated differently. The main differences between these two types of loans are as follows:

1. Purpose:
• Commercial Loan: Commercial loans are typically intended for business purposes. They are used by businesses to fund various needs, such as working capital, purchasing commercial real estate, acquiring equipment, or expanding operations.
• Consumer Loan: Consumer loans are primarily meant for personal use by individuals. Consumers use them to finance personal expenses, such as buying a car, home renovations, paying for education, or covering medical bills.

2. Regulation:
• Commercial Loan: Commercial loans are subject to fewer consumer protection regulations compared to consumer loans. The terms and conditions of commercial loans are often negotiated between the lender and the business borrower, with fewer legal restrictions.
• Consumer Loan: Consumer loans are subject to stringent regulations and consumer protection laws in Australia. The government and regulatory authorities have established laws, such as the National Consumer Credit Protection Act (NCCP), to protect consumers from predatory lending practices and ensure transparency in lending terms.

3. Interest Rates:
• Commercial Loan: Interest rates on commercial loans may vary widely depending on the lender, the borrower’s creditworthiness, and the specific terms of the loan agreement. Commercial loan interest rates are often higher than those for consumer loans.
• Consumer Loan: Consumer loan interest rates are regulated, and lenders are required to provide clear information about the interest rate, fees, and charges associated with the loan. This helps consumers compare loan offers and make informed decisions.

4. Terms and Conditions:
• Commercial Loan: The terms and conditions of commercial loans are typically more flexible and can be customized to meet the specific needs of the business. Loan terms, repayment schedules, and collateral requirements can vary widely.
• Consumer Loan: Consumer loans have standardized terms and conditions that must comply with consumer protection laws. Lenders must provide borrowers with a clear loan contract that outlines the key terms, including interest rates, fees, repayment schedules, and the total cost of the loan.

5. Credit Assessment:
• Commercial Loan: Lenders often assess the creditworthiness of a business by examining its financial statements, business plan, and credit history. The borrower’s ability to repay the loan is a primary consideration.
• Consumer Loan: Consumer loans require lenders to conduct responsible lending assessments, which include assessing the borrower’s income, expenses, and credit history to ensure they can afford the loan without undue financial hardship.

6. Documentation:
• Commercial Loan: Commercial loan agreements may involve complex documentation tailored to the needs of the business. These agreements may include provisions related to collateral, covenants, and business-specific terms.
• Consumer Loan: Consumer loan agreements typically have standardized documentation that is easier for consumers to understand. Lenders are required to provide borrowers with a clear and concise credit contract.

It is important for both businesses and individuals to understand the differences between commercial and consumer loans, as well as the applicable legal and regulatory requirements, before entering into any loan agreement in Australia.

 

Personal Guarantors to Commercial Loans

In Australia, personal guarantors to commercial loans are afforded certain consumer protections to ensure that they understand their obligations and are not subject to unfair or predatory lending practices. These protections are primarily governed by the National Consumer Credit Protection Act 2009 (NCCP Act) and related regulations. Here are some key consumer protections provided to personal guarantors of commercial loans:

1. Credit Assessment and Responsible Lending Obligations:
• Lenders are required to conduct a thorough credit assessment of the personal guarantor to determine whether they have the capacity to meet their obligations under the guarantee without experiencing financial hardship.
• Lenders must adhere to responsible lending obligations, which include assessing the guarantor’s income, expenses, assets, and liabilities to ensure that the loan is suitable for their financial circumstances.

2. Provision of Key Information:
• Lenders are obligated to provide the personal guarantor with clear and concise information about the guarantee, including the extent of their liability and the potential consequences of default.
• Guarantors should receive a copy of the loan contract and a separate document outlining their rights and obligations as guarantors.

3. Cooling-Off Period:
• Personal guarantors are entitled to a cooling-off period in which they can withdraw from the guarantee agreement without penalty. The cooling-off period typically lasts for 14 days from the date the guarantor signs the agreement.

4. Guarantee Limitations:
• Guarantees can be limited to a specified amount or time frame, ensuring that guarantors are not held liable for more than they originally agreed to or for an indefinite period.

5. Independent Legal Advice:
• Lenders may recommend or require personal guarantors to seek independent legal advice before entering into a guarantee agreement, especially if the guarantor is a family member or friend of the borrower.
• This legal advice helps ensure that guarantors fully understand the legal implications of their commitment.

6. Financial Counselling and Assistance:
• Personal guarantors who find themselves in financial distress due to the guarantee may have access to financial counselling and assistance services to help them manage their financial situation.

7. Prohibition of Unconscionable Conduct:
• Lenders are prohibited from engaging in unconscionable conduct when dealing with guarantors. This includes unfair or oppressive behaviour that takes advantage of a guarantor’s vulnerability or lack of understanding.

8. Dispute Resolution Mechanisms:
• Guarantors have the right to access dispute resolution mechanisms in case of disputes or concerns related to the guarantee.
It is important for personal guarantors to thoroughly review all documents, seek independent legal advice if necessary, and understand the implications of becoming a guarantor before entering into a guarantee agreement for a commercial loan. These protections are in place to safeguard guarantors from unfair practices and to promote responsible lending practices in the commercial lending industry.

 

Case Study

 

NSW Credit Law has recently been involved in a matter whereby self-proclaimed commercial lenders are using guarantee clauses within the supposed commercial loan documents to extend the liability for alleged commercial loans to natural persons.

 

The commercial lenders claim they do not need to hold an Australian Credit Licence, do not need to be affiliated with an external dispute resolution partner and that the natural persons are not entitled to the protections afforded to consumers under the National Consumer Credit Protection Act 2009 (NCCP). The lenders hide behind the veil that they are only lending to corporate entities.

 

The definition of consumer under the NCCP is broad and does not leave much to interpretation. At Section 5 of the NCCP Act, the definition of consumer is – “consumer” means a natural person or a strata corporation.

 

There are legal differences between consumer and commercial loans. The laws, and the protections provided to borrowers, differ depending on the purpose of the loan.

 

Laws regulating commercial loans offer less protection to borrowers because the beneficiaries of the loan are business or corporate entities that are afforded limited liability. When either a business or a company function with limited liability this means that assets attributed to the associated individuals (shareholders, directors) cannot be seized to repay debt obligations attributed to the company.

 

A corporate borrower is usually asked to sign a business purposes waiver which waives their right to protection under NCCP. The corporate borrower would benefit from the limited protections under Australian Securities and Investments Commission Act 2001.

 

However, once a guarantee clause is inserted into the loan agreement requesting that a natural person become liable for the loan then the natural person should be treated as a consumer for the purposes of NCCP as defined within the legislation. Why? Because the natural person is not afforded the limited liability that a corporate entity is and the finances and assets of the natural person can be seized by the lender to satisfy any default by the principal borrower.

 

In the case reported on, NSW Credit Law was instructed to act for the natural person guarantor:

 

  1. The loan documents did not stipulate the loan was for commercial purposes
  2. The word “commercial” did not appear once in the loan document or terms and conditions
  3. The principal borrower and the guarantor did not sign a business purposes waiver
  4. The guarantee was not a separate document but was a clause hidden within the loan documents
  5. The signature field for the guarantee was on the same page and directly below where the signature field for the loan was located, which was misleading
  6. The guarantor was a vulnerable person suffering financial hardship and mental health issues
  7. The lender attempted to bankrupt the guarantor and take their home (real property)

 

The case was settled and the bankruptcy proceedings were discontinued. The home (real property) of the natural person was saved.

 

The conduct of the lender, as reported in this article, is still the subject of a complaint to ASIC. We shall provide further updates on the progress of that complaint at the proper time.

 

The information in this article is general in nature and should not be taken as specific advice. If you think you have been taken advantage of by unlicensed commercial lenders, please do not hesitate to contact our office for specific advice.

 

Disclaimer: When researching and drafting this article we may use an AI advanced language model amongst other sources. It is intended for general informational purposes and should not be used as a substitute for professional advice. While every effort has been made to ensure the accuracy and reliability of the information provided, we cannot guarantee its completeness, timeliness, or appropriateness for any particular purpose. Usage of this information is at the reader’s own risk. We are not liable for any errors, omissions, or results that may be obtained from the use of this information. Always consult with a qualified professional before making any decisions based on the content of this article. For legal advice please contact Paul Thorndike on 0429 008 247 or at paulthorndike@nswcreditlaw.com.au

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