It is very important to understand the difference between commercial and consumer finance in Australia before you sign any contracts. Below are some of the key points of difference between the two you must be aware of and understand.
The difference in protection for borrowers of consumer and commercial loans is significant. The law provides the highest level of protection to consumers borrowing for household purposes such as personal loans, car loans, home loans, credit cards, payday loans and residential investment loans. Borrowers for investments receive a lower level of protection. The Australian government regulates what lenders will disclose to borrowers, how interest is calculated, how the loans are enforced and set limits on default charges.
The lowest level of protection is provided to borrowers of commercial loans, including those to small business owners, companies and business owners. A commercial loan may be needed for the purchase of goods and services, supplies, commercial premises, machinery and running of the business. Commercial borrowers are, however, protected against unconscionable conduct and misleading and deceptive conduct.
Consumer lending is tightly governed by the National Consumer Credit Protection Act 2009. There is a range of regulators designed to look out for the best interests of consumers including the ACCC, APRA and ASIC.
Business loans don't fall under the NCCP and don't have the same regulators looking after the interests of business owners. There have been calls for the introduction of the Australian Small Business Borrowers' Bill of Rights which would lead to a more transparent and accountable small business lending market.
Interest Rate Disclosure
Consumer loan advertising and documentation must include not only the interest rate but also the Annualised Percentage Rate (APR) which takes into account all the upfront and ongoing fees so the borrower can make a fair comparison between loans. Commercial loan advertising and documentation don't need to include the interest rate or APR. The difficulty in comparing commercial loans, is one of the main reasons business owners use a broker because they don't have the time or experience to can analyse hundreds of loans to find them the best deal.
Most loan types for 'mums and dads' wanting to buy a home, car, holiday etc are available to the public to research and sign directly with the lender. A large number of commercial loan lenders don't advertise details of their loans in the public domain and don't take enquiries from the public. Their loans are only made available through a broker.
Consumers have the regulatory bodies ACCC, APRA and ASIC to assist them in sorting out any disagreement they have with a lender. If the matter continues unresolved, they may have their dispute heard by the Financial Ombudsman Service Limited (FOS) or the Credit and Investments Ombudsman (CIO).
As a holder of an Australian Credit Licence Financepath is required to hold current membership with an external dispute resolution body that provides our clients with an avenue to resolve any concern or dispute they may have with respect to our conduct. We hold a current membership with the Financial Ombudsman Service Limited (FOS).
In the case of commercial loans, ASIC believes disputes should be resolved between the lender and business, therefore, it doesn't make the resources of APRA and ASIC available for businesses to contact in the case of a disagreement with their lender. The assistance of a third party such as a broker is needed to provide the business owner with intermediary force against the lender to settle disputes. Finally, disputes may be heard by the Credit & Investments Ombudsman (CIO) and the Financial Ombudsman Service Australia (FOS) through their External Dispute Resolution scheme.
All loans, whether they be for consumer or commercial purposes, will most probably include the "unilateral variation clause" in the terms and conditions. This clause may be termed differently but exist across home loans, car loans and most other forms of credit contracts. This clause states that the lender can change any of the terms and conditions at any time without giving notice including an increase in the interest rate charged or the loan can being called in at any time. Historically lenders have tended to use this clause to enable them to make changes to commercial contracts more so than consumer contracts and therefore businesses are at greater risk of this occurring compared to an individual.
Using a finance specialist allows business owners assistance with the daunting task of finding their ideal commercial loan. A broker can explain the differences in the research, access and regulation of commercial loans. Before signing any business loans, owners should ensure they understand the documentation and if not, ask their finance specialist to explain it further.
If you have any questions on commercial or consumer finance, please give us a call on 1300 780 440 and we'd be happy to answers your questions.
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