Financial Ombudsman Susan Taylor is warning small business owners to seek advice before applying for business loans using their homes, trusts or parent’s properties, as guarantees for debt.
Financial Services Complaints Limited (FSCL) a free dispute resolution service, has reported an increase in complaints over the past six months, indicating that consumers are under increasing pressure to service debt. Last month, credit bureau, Centrix, reported that almost half a million New Zealanders were behind on their debt, with these numbers expected to rise.
“As financial pressures increase, it is understandable that many may consider accessing credit through business borrowing as a viable option,” explains Taylor. “However, in addition to seeking independent legal advice, it is also important to know that the protections afforded by the CCCFA (Credit Contract and Consumer Finance Act) do not apply to family trusts, or business loans. In other words- the protection only applies in instances where it is a personal loan.”
In one recent case, a man lost his home and a lender started action to sell his stepmother’s home to settle the outstanding debt, as she had been listed as a guarantor for a business loan.
In another, elderly parents in their eighties lost their family home, after their daughter’s home was sold to pay off an outstanding business loan- which had not been paid back in full.
“Consumers should bear in mind that business loans are not consumer credit contacts and responsible lending obligations do not apply to business loans, even if the borrower has given security over their home,” explains Taylor, adding that while consumers can apply for hardship assistance when struggling to keep up with a personal loan- and the lender is legally obligated to consider a hardship application- this is not the same for business loans.
In another recent case, Denise, who applied for a business loan to get her new floral business up and running originally borrowed $20,000. Using her home as security for her business and having borrowed an extra $30,000, when Denise fell ill unexpectedly and couldn’t work, she asked for hardship assistance.
The lender declined the application, because the loans were business loans and under the law, they were only required to assess hardship applications for personal loans to individuals.
Likewise, in another case, a consumer argued that a lender had failed to meet responsible lending obligations, particularly to ensure a trust could afford the lending. Again, as the CCCFA does not apply to trusts, the man faced losing his home, which had been used as security for a loan.
Aleki and his accountant are the trustees of a family trust. The trust owned two properties, both of which had been used to secure a loan to refinance an existing loan to another lender that the trust had been unable to pay.
When Aleki failed to repay the loan, he had no choice but to put his family home up for sale to pay the debt.
“As with the examples of the business loans, consumer protections do not apply where lending is to a family trust, there is an increased risk of losing the family home and other assets, if the trust cannot repay the debt,” says Taylor.
“If consumers, or small business owners are struggling, we advise that they seek the help of a financial mentor, or a business adviser. This might mean making some tough decisions, especially around the viability of a business plan, but it is better to have these conversations sooner rather than later. As you run out of time, your options become fewer, debt is often significantly higher and the risk of losing assets, much greater.”
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