TRANSCRIPT
Australian Small Business and Family Enterprise Ombudsman Bruce Billson interview with Rod Henshaw.
2CC Canberra
Subject: Perils of fringe financiers for small businesses
Rod Henshaw
Well, Bruce Billson has always been a champion of small business, even when he was in government. These days, of course, Bruce is the Australian Small Business and Family Enterprise Ombudsman and he's written a piece for the Canberra Times today about the perils of fringe financiers for small business. Bruce is on the line with me now. Bruce Billson, good afternoon.
Bruce Billson
Rod, awesome to be with you and your listeners, sir.
Rod Henshaw
That's what I like about you, Bruce. You're always available, you're always accessible and you always have a good word to say about small business. In this case, we're talking about the perils of fringe financiers. How do you define a fringe financier?
Bruce Billson
Well, we're using that phrase to capture those that sit outside some of the safeguard mechanisms that are there for finance. That's AFCA, the Australian Financial Complaints Authority. They play a really critical role.
If a small business or a regular consumer gets into a dispute with a financier or an insurance company, they can't work out the issues internally, and then AFCA can step in, have a look at the matter and for members of the AFCA scheme, can issue a determination on what a reasonable outcome looks like. That's the bulk of the small business lenders but there's many that sit outside that scheme. And you don't have that safeguard, that opportunity for dispute resolution if things start getting off track and you don't feel like you're getting a fair hearing or the financier’s not taking account of your circumstances.
Rod Henshaw
How come these so-called financiers, fringe financiers, how come they're allowed to get outside of the – because it's usually quite regulated, if not overregulated in some parts.
Bruce Billson
Yeah, look, and it still is to an extent, but obviously in some areas of lending, particularly lending to business, it's not as buttoned down as it might be for consumer lending. And one of the things is you can provide finance in a range of different methods to business and not be subject to some of the rules and safeguards that might be in play if you're a consumer. Having said that, most of the mainstream credible small business lenders are part of the AFCA scheme, but there's a few that aren't. And we're seeing – because they're not part of the AFCA scheme – when a dispute arises, those businesses are turning to us for help just as if it was a business-to-business dispute where we ordinarily help anyway.
Rod Henshaw
Yeah, but the question remains, Bruce, I mean, how are they allowed to continue? How are they allowed to exist in this day and age when there's so much tightening up of these sorts of things, especially with the banks and this sort of thing and lenders generally.
Bruce Billson
Yeah, look, in some cases, some of the rules that are applied to, say, consumer lending aren't terribly useful for business. I'll give you an example. If you and I were going to, you know, borrow for a house. They have a look at what our actual income is and our actual outgoings. If you and I are in a business, it's not what we're spending now that matters, it's what we want to do with the money – and that might be to grow the business and have more income. And then some of those responsible lending frameworks don't apply that well, so that's how you get that distinction.
But that doesn't mean small business lenders shouldn't have the comfort of knowing that if a dispute arises, they can go somewhere to get help. And that’s what AFCA does. But what we're seeing for those that aren't, those lenders that aren't part of the AFCA scheme, we're seeing some ordinary outcomes. Really, it's almost, you know, predatory lending.
You're seeing some financiers taking advantage of the disadvantage, the distress, in some cases the desperation of small business lenders to come up with financing options that if you look at the fine print, the interest rates are over 300%. You might be lending, borrowing a chunk of money just to pay a tax debt that you've been leaned on to settle. And that, that may have penalties if you miss a payment, hundred dollars for the first few days, but after that it could be as much as $1,000 a day Rod. And what we've seen is in some cases people are borrowing six, seven, eight thousand dollars. A few short months later they're getting chased for fifty – sixty thousand dollars. That's outrageous. And what I'm saying is take particular care with those lending alternatives because some of them are just too punishing to contemplate.
Rod Henshaw
Well Bruce, how can businesses, now, I take your point there because there would be some desperate businesses these days – they've come out of COVID, they've probably done it tough there. Then of course, you've got the rising power costs, rising operating costs generally. They do get desperate, and I guess the banks possibly won't lend them.
Bruce Billson
That's right. And you know, and people are taking advantage of that desperation. Some of the mainstream lenders don't find lending to those sorts of businesses attractive. They're worried about their credit worthiness. And yet there's some people saying, look, we'll take these on, but boy, here's some really eye watering interest rates, and you step out of line – before you know it, as a caveat on your house for an amount of money that looks many times the amount that you borrowed. And if people don't turn to us or the small business debt helpline, that can really have an enormous impact. So, I'm urging people, you know, no matter how desperate the situation is, take particular care, read the fine print, get advice and if you get into trouble, ask them to take into account your vulnerability. If that doesn't work, reach out to the small business debt help line, reach out to financial counselling or reach out to us and we may be able to help.
Rod Henshaw
How can you help if they get into those sorts of things?
Bruce Billson
Well, what we do is, we treat it as a regular business to business dispute – which under our legislation, all we ask is that parties engage in good faith. And that means, well let’s have a look – what are the terms, what are the conditions, is the behaviour reasonable, what does a commercially acceptable outcome look like for both parties? What we’ve seen in some cases, those fringe financiers realise someone's watching them and they'll dial back on some of the interest charges. They might be a little less aggressive on the penalties or they might be prepared to talk to us about a resolution, a payment arrangement that they've rejected previously when the small business owner has gone directly to them.
Rod Henshaw
You mentioned the checklist. Perhaps a business should go through before they start looking at lenders. But how do you identify the real deal from the dodgy one?
Bruce Billson
Well, the ones that are AFCA members publicise the fact because they're proud of the fact they're involved with that scheme. So, that's a good place to start. Are they or are they not an AFCA lender? I tend to favour the AFCA lenders because there is that safeguard that they'll be part of that dispute resolution scheme.
It's also important to have clarity around what the terms and the arrangements are for that lending. Often, they'll publicise a daily rate, but you think, oh, that looks okay, but when you work it out over the year, it's hundreds of percent. So, these are the sorts of things that we ask people to take a careful look at, what the penalty clauses might look like and even get some advice from a trusted advisor – your accountant, your bookkeeper, your business advisor – they can often shed good light on what the arrangements are.
Rod Henshaw
Well, in extreme cases, Bruce, I mean, if it does get to that sort of thing, if it gets to that sort of stage and the person falls into that trap and they're inextricably trapped in there, is there any legal recourse they can take? It's going to cost money, obviously, but it may be the only way they could go. Could they go to court and challenge it?
Bruce Billson
Look, they can, but you start needing to find grounds for that. And that's one of the areas where we've been advocating for an unfair business practices prohibition. That is a new tool that ASIC and other regulators can use where these unsavoury arrangements are being foisted upon people – or where they're taking advantage of the desperation of a small business who's really, you know, trying to get their head out of a noose, but they might find themselves actually just putting it into a bigger noose.
So, that's the sort of thing that we've been advocating. If the terms haven't been properly disclosed, that can be another avenue. And even, you know, what we ask is that people take account of genuine vulnerability and whether that's being accommodated as well.
Rod Henshaw
So, how often does the Australian enterprise organisation, how often are they approached?
Bruce Billson
We get about 8,000 approaches a year, but thankfully not all of them of this kind. We get several dozen of this kind and that's where we’ve developed some experience. But we also surface that experience with the regulators to say, hey, maybe this is something you need to take a closer look at because there's something NQR going on here.
Rod Henshaw
Okay, well, I guess its buyer beware, as always with these sorts of things.
Bruce Billson
Absolutely. Look, check out and read the documentation. No matter how desperate the situation, taking the time to read the documentation, understand the proposition that's being put to you. Very important.
Rod Henshaw
Good on you, Bruce. Always good to talk. I appreciate your time this afternoon.
Bruce Billson
Thank you, sir. Take care.
Rod Henshaw
Bruce Billson, the Australian Small Business and Family Enterprise Ombudsman.