Ombudsman to call on banks to give small businesses three months’ notice before ending loans

Australian banks would be required to give small businesses at least three months notice before ending or substantially changing their loan, if a recommendation by small business ombudsman is adopted.

Australian Small Business and Family Enterprise Ombudsman Kate Carnell has been “forensically” examining how the big banks treat their small business customers since August and her report into the banking sector is expected to be released tomorrow.

Read more: Should small business loans be capped at $1 million?

The report is expected to include a series of recommendations to the federal government, including changes to how much notice the banks are required to give their small business customers.

According to Fairfax, the recommended notice period could be up to six months for businesses with rural properties or complex structures.

“The reality is that business loans are regularly ongoing—you might borrow to buy a business or set up a business, you expand and pay some back, and then you borrow more,” Carnell told SmartCompany.

“Business loans are not like home loans. They are ongoing, they go up and down depending on where you are in the growth of your business. It’s a huge problem if a bank decides not to refinance.”

While the full details of the recommendation will be made available when Carnell’s report is made public this week, she said throughout the inquiry’s public hearings that this issue of communication is a matter that needs to be “addressed urgently”.

“What we found in a range of the cases we investigated, what’s happened is the business has been given the expectation that they will have a new loan or their loan will roll over, [and] discussions … have been positive,” Carnell says.

“And then, sometimes days before the loan is due to finish, they’ve been told that the bank has decided not to refinance.

“The dilemma is small businesses don’t usually have lazy money ready to pay the bank back. In a number of cases, it’s meant the company or business has been forced into receivership.”

This starts a domino effect for businesses, says Carnell, as the moment a bank decides not to refinance a loan, the business’s loan is in default and the interest rate on the amount owed can increase substantially.

“Not only are you having to repay money you don’t have, but the cost of that money increases significantly,” she says.

Businesses will then attempt to secure finance from another lender, but having a loan in default with the first bank makes that even harder.

Carnell says having enough time to secure a new loan, sell existing assets or restructure a business is critical in this situation.

“I think three months is the absolute minimum, but it will regularly take long than that,” she says.

“It certainly shouldn’t be shorter than three months.”

While Carnell is clear that lenders are well within their rights to choose not to finance particular businesses, she says the current 10-day notice period included in the Banking Code of Practice is “obviously not doable”.