‘Premium’ SME Borrowers Are Bad News

Underestimating the appetite of premium quality borrowers has led to a revenue downgrade for fintech business lender Prospa and a 28 per cent reduction in its share price. Via InvestorDaily.

Prospa shares crashed 27 per cent to a record low of $2.80 on Monday morning following the release of the group’s trading and guidance update.

Prospa has revised its revenue forecasts down by 8 per cent to $143.8 million from the $156.4 million as advertised in the company’s prospectus. Prospa floated on the ASX in June with an IPO price of $3.78 and rallied almost 20 per cent in day of trading, lifting the company’s market cap to $720 million. 

However, following this week’s trading update, the company is now valued at $450 million. Sales and marketing expenses are forecasted to be $80.1 million for the calendar year, up 5.5 per cent from the $75.9 million forecast in the prospectus. 

EBITDA is forecast to take a 62 per cent hit from $10.6 million to $4 million. 

Prospa stated that the downward revision to its revenue predictions is largely due to its “premiumisation strategy exceeding our forecast”. Premiumisation is traditionally a strategy employed by companies to make consumers pay more for a product by promoting its exclusivity. But for a small business lender like Prospa, premium customers are actually less profitable. 

“While we continue to grow our lending to all credit grades, we are seeing increased appetite for our solutions from premium credit quality customers who pay lower interest rates over longer terms,” the company said. 

Prospa said its strategy to optimise its cost of funding has facilitated lower rates for customers and broadened its customer base and appeal – allowing the company to tap more of the $20 billion addressable market. 

“The introduction of a new rate card in early April was more successful than anticipated, with approximately 43 per cent of Prospa’s portfolio now represented by premium customers,” the company said. 

“The evolution in book composition towards premium grades has led to a short-term impact on revenue, despite the positive impact premiumisation has had on market penetration, operating leverage, funding diversity and portfolio resilience.”

Lending rates to premium customers are lower than the average book rate and the loan duration is longer. In the four months to 31 October 2019, the average simple interest rate on Prospa’s book has adjusted to 18.5 per cent compared to the prospectus forecast at 18.9 per cent and average loan term has increased to 14.6 months (Prospectus at 14 months). 

Early indications are that the static loss rates in the growing premium section of our loan book are well below 4 per cent, which is the bottom of the risk appetite range.

Greg Moshal, co-founder and joint CEO of Prospa, admitted that the lender is experiencing some short-term impacts on its forecasts, but said he remains confident Prospa has the right growth strategies to deliver long-term shareholder value and solve the funding challenges of small business owners across Australia and New Zealand. 

“Originations are growing,” he said. “Portfolio premiumisation means a higher quality loan book and lower rates and longer average terms for our customers. Early loss indicators continue to improve and we expect to continue to invest in new products, sales and marketing.”

Alt Funders Overtake Banks As SME Cash Flow Is Stretched

A new trend has emerged in the SME lending space, with Australian small businesses more likely to use a non-bank to fund growth rather than their main bank, according to a national survey, via Australian Broker.

Small business owners’ reliance on non-banks is the highest it’s ever been, with 18.7% of SMEs planning to fund revenue growth with such a lender, as charted in the September 2019 SME Growth Index commissioned by Scottish Pacific and drawing data from over 1,000 businesses.

Conversely, business owners planning to fund their growth via their main bank has halved, dropping from 38% in the first year of reporting in 2014 to 18.3% in the most recent data.

The main reason given for turning away from banks, cited by 21.3% of the SMEs, was avoiding having to use property as security against new or refinanced loans, up from 18.7% in September 2018.

Other considerations contributing to the gravitation towards non-banks included reduced compliance paperwork (19.8%), short application times (17.1%), royal commission disclosures (8.8%) and banks’ credit appetite (6.9%).

Of the SME owners relying on non-bank funding, 77% utilise invoice finance, 23% merchant cash advances, 10% peer to peer lending, 9% crowdfunding and 5% other online lending.

Just 2.6% of those surveyed indicated they would not consider using a non-bank lender – down from 4.0% last year.

“[However], the SME sector still has a long way to go in taking advantage of the alternatives available to them,” said Peter Langham, Scottish Pacific CEO.

“Some business owners remain unaware of funding alternatives. [They] are aware of non-bank funding, but don’t fully understand how it works.

“They are too busy to research it, so put this in the ‘too hard’ basket. When they can’t secure bank funding, they just tip their own money in to fund growth.”

For growth SMEs, almost twice as many as in H1 2018 say their cash flow is
worse or significantly worse (21.2%, up from 12.3%). At the same time,
non-growth SMEs reporting worsening cash flow has increased to 17.6%, up from 10% in H1 2018.

According to the survey, 83% of business owners plan to stimulate revenue growth with their own funds.

ASIC sues Bendigo and Adelaide Bank for use of unfair contract terms

ASIC has commenced proceedings in the Federal Court of Australia against Bendigo and Adelaide Bank concerning unfair contract terms in small business contracts.

ASIC alleges that certain terms used by Bendigo and Adelaide Bank in contracts with small businesses are unfair. If the Court agrees with ASIC, the specific terms will be void and unenforceable by the Bendigo and Adelaide Bank in these contracts.

ASIC alleges that certain terms used by the Bendigo and Adelaide Bank and are unfair, as the terms:

  • cause a significant imbalance in the parties’ rights and obligations under the contract;
  • were not reasonably necessary to protect the Bendigo and Adelaide Bank’s legitimate interests; and
  • would cause detriment to the small businesses if the terms were relied on.

Some of the unfair terms pleaded by ASIC include clauses that give lenders, but not borrowers, broad discretion to vary the terms and conditions of the contract without the consent of the small business owner, along with clauses that allow the bank to call a default, even if the small business owner has met all of its financial obligations.

ASIC is also seeking a declaration from the Federal Court that the same terms in any other small business contract are also unfair.

Background

If the Federal Court finds that any of the terms of the standard form contracts are unfair, the unfair terms are void (it is as if the terms never existed in the contracts). ASIC is seeking that the terms are declared void from the outset – not from the time of the court’s declaration. The remainder of the contract will continue to bind parties if it can operate without the unfair terms.

Since 1 July 2010, ASIC has administered the law to deal with unfair terms in standard form consumer contracts for financial products and services, including loans.

With effect from 12 November 2016, the unfair contract terms provisions applying to consumers under the Australian Consumer Law and the ASIC Act were extended to cover standard form ‘small business’ contracts.

Small businesses, like consumers, are often offered contracts for financial products and services on a ‘take it or leave it’ basis, commonly entering into contracts where they have limited or no opportunity to negotiate the terms. These are known as ‘standard form’ contracts. Small businesses commonly enter into these ‘standard form’ contracts for financial products and services, including business loans, credit cards, and overdraft arrangements.

The unfair contracts law applies to standard form small business contracts entered into, or renewed, on or after 12 November 2016 where:

  • the contract is for the supply of financial goods or services (which includes a loan contract);
  • at least one of the parties is a ‘small business’ (under the ASIC Act, a business employing fewer than 20 people is a ‘small business’); and
  • the upfront price payable under the contract does not exceed $300,000, or $1 million if the contract is for more than 12 months.

In March 2018, ASIC released Report 565: Unfair contract terms and small business loans. The report:

  • Identifies the types of terms in loan contracts that raise concerns under the law;
  • Provides details about the specific changes that have been made by the ‘big four’ banks to ensure compliance with the law; and
  • Provides general guidance to lenders with small business borrowers to help them assess whether loan contracts meet the requirements under the UCT law

ASIC sues Bank of Queensland for use of unfair contract terms

ASIC has commenced proceedings in the Federal Court of Australia against the Bank of Queensland concerning unfair contract terms in small business contracts.

ASIC alleges that certain terms used by Bank of Queensland in contracts with small businesses are unfair. If the Court agrees with ASIC, the specific terms will be void and unenforceable by the Bank of Queensland in these contracts.

ASIC alleges that certain terms used by the Bank of Queensland are unfair, as the terms:

  • cause a significant imbalance in the parties’ rights and obligations under the contract;
  • were not reasonably necessary to protect the Bank of Queensland’s legitimate interests; and
  • would cause detriment to the small businesses if the terms were relied on.

Some of the unfair terms pleaded by ASIC include clauses that give lenders, but not borrowers, broad discretion to vary the terms and conditions of the contract without the consent of the small business owner, along with clauses that allow the bank to call a default, even if the small business owner has met all of its financial obligations.

ASIC is also seeking a declaration from the Federal Court that the same terms in any other small business contract are also unfair.

Background

If the Federal Court finds that any of the terms of the standard form contracts are unfair, the unfair terms are void (it is as if the terms never existed in the contracts). ASIC is seeking that the terms are declared void from the outset – not from the time of the court’s declaration. The remainder of the contract will continue to bind parties if it can operate without the unfair terms.

Since 1 July 2010, ASIC has administered the law to deal with unfair terms in standard form consumer contracts for financial products and services, including loans.

With effect from 12 November 2016, the unfair contract terms provisions applying to consumers under the Australian Consumer Law and the ASIC Act were extended to cover standard form ‘small business’ contracts.

Small businesses, like consumers, are often offered contracts for financial products and services on a ‘take it or leave it’ basis, commonly entering into contracts where they have limited or no opportunity to negotiate the terms. These are known as ‘standard form’ contracts. Small businesses commonly enter into these ‘standard form’ contracts for financial products and services, including business loans, credit cards, and overdraft arrangements.

The unfair contracts law applies to standard form small business contracts entered into, or renewed, on or after 12 November 2016 where:

  • the contract is for the supply of financial goods or services (which includes a loan contract);
  • at least one of the parties is a ‘small business’ (under the ASIC Act, a business employing fewer than 20 people is a ‘small business’); and
  • the upfront price payable under the contract does not exceed $300,000, or $1 million if the contract is for more than 12 months.

In March 2018, ASIC released Report 565: Unfair contract terms and small business loans. The report:

  • identifies the types of terms in loan contracts that raise concerns under the law;
  • provides details about the specific changes that have been made by the ‘big four’ banks to ensure compliance with the law; and
  • provides general guidance to lenders with small business borrowers to help them assess whether loan contracts meet the requirements under the UCT law.

SMEs continue to struggle with cashflow

Australian SMEs are still suffering as 70% of brokers agree that cashflow is “definitely more” of a problem to small businesses now compared to 12 months ago. Ninety-two percent of them believe finance is “more difficult” to access after the Banking Royal Commission, according to a recent poll of the broking community commissioned by B2B finance provider Apricity Finance; via MPA.

With the increased need of finance worsened by the increased challenge of accessing it from tier one banks, the royal commission almost created a “perfect storm scenario” for small businesses, Apricity Finance CEO Linden Toll said.

Working closely with finance brokers, Toll and his team believe brokers have “a unique view on businesses”.

“Like the canary in the coalmine, the trends that brokers see across the SME sector can often be indicative of longer-term problems,” he said.

The research also revealed the broker community found businesses with a yearly turnover of less than $5m, which is the majority, are the ones likely to face cashflow problems. According to Toll, 68% of survey respondents believe that those problems are mainly caused by late invoices and long invoice payment terms.

“Small businesses are hugely important to the Australian economy and employ more than four and a half million Australians, more than those employed by the whole of the ASX 200,” he added.

The findings of the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) in their report in April 2019 echoes Toll’s sentiment. The ombudsman’s head and ex-chief minister for the ACT Kate Carnell stated in the report that they’ve “received over 2,400 surveys from small and family businesses across the country raising issues on late payments and long payment times”.  

“Where large corporations delay payment to their small business suppliers, small business cash flow is unpredictable and presents significant difficulties in their ability to access and service finance. Cash flow is king to small business — poor cash flow is the primary reason for insolvency in Australia,” Carnell said.

Linden and his team recommend that small businesses that think cashflow is becoming an issue to act early and take the needed steps to make sure they don’t fall into the 40% of businesses that don’t reach their fourth year

Property downturn bites business owners

Almost half the SMEs (44.5%) say property market conditions are already making it harder for them to access business funding, likely due to softening house prices in major markets, according to the latest Scottish Pacific Business Finance report, based on research by East & Partners who interviewed 1,257 SME businesses with annual revenues of A$1-20 million over a seven-week period ending 18 January 2019.

Of course this is a relatively narrow segment of the SME market, as many will have significantly lower turnover.

The report said that a further 35% haven’t yet felt the impact, but fully expect the housing price correction and broader property market conditions
including slowing loan approvals will have a significant impact on their borrowing capacity.

When property market impact was last assessed in September 2017, three out of four SMEs said property prices were having no direct impact on their businesses. This round, only one in five SMEs said they had not yet seen a direct impact.

This minority of non-affected SMEs perhaps reflects how broad the base of Australia’s small business sector is, with more than two million enterprises across a wide range of industries and regional markets.

Property prices are having more impact on SMEs in Victoria and NSW (affecting 48% and 46% respectively), with Queensland small businesses (39%) the most buffered.

Declining or no-change SMEs are being hit harder by property market movements, with 54% of non-growth SMEs already impacted (compared to 36% of growth SMEs).

For these non-growth SMEs, finances are already stretched thin and they are feeling “when it rains it pours”. These are the businesses that currently need the most support to get through tough market conditions.

More than 91% of SMEs would be prepared to pay a higher rate to obtain finance if they didn’t have to provide real estate security. This overwhelming sentiment is voiced at a time when a sharp correction in residential property prices is affecting capital cities, coupled with falling building approval data and predictions by analysts such as Core Logic and UBS of tough market conditions still to come.

Of the nine out of 10 business owners who say they would be willing to pay a higher rate for finance if they could avoid using property as security, almost two-thirds (65%) indicated they ‘definitely’ would be willing, and more than a quarter (26%) said ‘probably’. Fewer than 1% of SMEs ‘definitely’ would not consider higher rates in place of borrowing against the family home, and just over 1.5% said it would be ‘unlikely’.

According to the Productivity Commission’s draft report into Australian financial system competition, a third to a half of Australian SME loan value is reliant on property security. For the major banks, 35% of their
small business lending (by loan value) is secured by real estate. For banks outside the majors this figure is higher, at almost 47%.

Tic:Toc Launches Home Loan For Business Owners

The new CO:Lab home loans, a collaboration between Tic:Toc and the $7 billion La Trobe Financial, can help self-employed Australian’s and business owners excluded by traditional eligibility requirements, as well as customers looking to refinance to invest money into their business.

Tic:Toc launched the World’s first instant home loan™ in July 2017 in partnership with Bendigo and Adelaide Bank, and is now collaborating with another key partner and shareholder, La Trobe Financial, to help bring the home loan process up to speed for a broader range of self-employed and small business applicants.

Announcing the launch of CO: Lab, Tic:Toc founder and CEO, Anthony Baum, said while major lenders continue to tighten lending to small businesses, Tic:Toc has specifically broadened its home loan suite to offer digital home loans to many more Australians, including a broader range of self-employed professionals and small business owners.

“More than 17% of Australians work for themselves, so it’s important home loans keep pace with the shifting workforce to support self-employed customers. “Australia’s self-employed and small business owners have traditionally endured a notoriously difficult home loan process, with an often impractical burden to provide large amounts of documentation.     

“Our partnership with La Trobe Financial, one of Australia’s longest operating and leading non-bank credit specialists, has created a broader set of loan options via Tic:Toc’s streamlined home loan assessment and approval technology. This means business owners and self-employed customers now have more loan options, with less hassle and at a lower cost. 

“For example, a business owner can use the equity in their home to invest in their business at home loan prices. This could save them up to around 6% per year on standard business loans from the major banks, and they can apply and be approved the same-day via our award-winning online platform.

La Trobe Financial President and CEO, Greg O’Neill said, “As a key shareholder in Tic:Toc, we’re excited to partner with Tic:Toc in developing and launching digital CO:Lab home loans and bring this unique digital approach to market for Australia’s business owners needing finance at such a very important time in the credit cycle. “As one of Australia’s longest operating and leading non-bank credit specialists, we want to support innovation in our industry. We are very proud to back Tic:Toc as they embrace smarter and more customer centric ways to assess and secure home loan and other finance for a broader range of clients moving forward.   

Warnings to SMEs seeking finance

An insolvency firm is warning brokers that small business owners looking for finance are becoming more and more likely to break the law, via Australian Broker.

The group, Jirsch Sutherland, said with the property downturn and possible negative gearing changes, directors need to be protected by Safe Harbour regulations.

Alongside uncertainty in the residential property market, company partner Ginette Muller said a credit squeeze or crunch was coming.

She said, “The current property climate is weighing heavily on anyone who either owns, or aspires to own, real estate.

“And this is particularly acute with small business, where access to finance is usually conditional on the bank securing the loan against the director’s house.”

The group said that owners faced with a credit squeeze often turn to solutions like repayment arrangements with the ATO, use other creditors by stretching out terms, selling surplus business assets, reducing overheads and streamlining staff.

Muller said this could lead many to trade while insolvent. She added, “Australia has some of the most draconian insolvent trading laws in the world and the reality is, if you are a director and you take any of these actions, you may be about to commit an offence.”

Safe Harbour was introduced in 2017 and is progressively being used as an insurance policy by directors in a bid to minimize the risk of breaching directors’ duties.

Directors are advised to seek Safe Harbour protection prior to negotiating repayment terms.

“Safe Harbour protection is confidential and is not expensive as the director and senior staff remain in control,” Muller said.

“There are rules they need to comply with to ensure they have a plan and are not driving themselves and creditors off a cliff. In exchange for their diligence, they can avoid the potential threat of insolvent trading. Safe Harbour is just another word for insurance.”

Government launches $2bn fund for SME lenders

As expected we are seeing the Government do “unnatural acts” to support the banking sector, in an attempt to alleviate the home price falls and lending freeze ahead of the election next year. The proposed $2 billion funding pool is small beer in the estimated $300 billion SME lending sector.

There is precedent a decade ago when the government’s $15 billion co-investment with the private sector into the residential mortgage-backed securities market during the GFC.

The federal government has announced a new, $2 billion Australian Business Securitisation Fund to help provide additional funding to small business lenders, via The Adviser.

In a joint statement, Treasurer Josh Frydenberg and the Minister for Small and Family Business, Skills and Vocational Education, Michaelia Cash, have announced that the Australian Business Securitisation Fund (ABSF) will “significantly enhance” the ability for small businesses to access funds by providing “significant additional funding to smaller banks and non-bank lenders to on-lend to small businesses on more competitive terms”.

The Australian Business Securitisation Fund will be administered by the Australian Office of Financial Management (AOFM), which was previously involved in the Residential Mortgage Backed Securities Market in 2008.

Speaking on Wednesday (14 November), the two ministers said: “Small businesses find it difficult to obtain finance other than on a secured basis – typically, against real estate. Small businesses that have already obtained finance secured against real estate, but wish to continue to grow, also find it difficult to access additional funding.

“Even when small businesses can access finance, funding costs are higher than they need to be.

“To overcome this and ensure that small businesses are able to fulfill their potential and continue to underpin economic growth and employment, the Australian Business Securitisation Fund will invest up to $2 billion in the securitisation market, providing significant additional funding to smaller banks and non-bank lenders to on-lend to small businesses on more competitive terms.”

The government has also reiterated that it will “encourage the establishment of an Australian Business Growth Fund to provide longer term equity funding”.

It is now in consultation with the prudential regulator (APRA) and several financial institutions in regard to the establishment of the fund, which could likely emulate overseas counterparts, such as the UK’s Business Growth Fund. This fund has reportedly invested around $2.7 billion in a range of sectors across the economy.

The ministers said: “Many small businesses find it difficult to attract passive equity investment which enables them to grow without taking on additional debt or giving up control of their business.

“A similar fund has not emerged in Australia, in part, as a result of the unfavourable treatment of equity for regulatory capital purposes.”

APRA has reportedly suggested that it is “willing to review these arrangements” to assist in facilitating the establishment of the Australian Business Growth Fund.

The government has said that it will host a series of meetings with stakeholders during the next sitting period in Canbera to “fast track” the establishment of the growth fund.

“With more than three million small businesses employing around seven million Australians, enhancing small business access to funding is part of the Coalition Government’s plan for a stronger economy,” the ministers said in a joint release.

Several players in the finance sector have welcomed the announcement, with NAB’s chief customer officer, business and private banking, Anthony Healy, saying that “the country’s largest business bank recognised that for Australia to continue to grow, SME businesses need better and easier access to capital”.

Mr Healy highlighted that NAB had been providing unsecured lending to small businesses through its QuickBiz channel, “helping SMEs borrow against the strength and cash flow of their business rather than physical bricks and mortar”.

He continued: “The Australian Business Growth Fund can help this further by providing a way in which SMEs can receive long term equity capital investments to grow their business, invest in new technology and create more jobs, which is why NAB is supportive of the concept.

“We do believe there is more that can be done to provide SMEs with access to equity capital, and we take confidence from the UK Business Growth Fund having operated successfully for several years.

“We look forward to further discussions with the federal government and other participants about the fund’s potential establishment soon,” said Mr Healy.

Likewise, Spotcap’s managing director, Lachlan Heussler, said: “Mr Frydenberg’s proposal meets a real financial need and is a win-win for both Australian small business owners and for the alternative lending industry in Australia.

“Without sustainable lending and affordable finance options, small and medium-sized businesses will struggle to grow, innovate and create more jobs for our economy.”

Mr Heussler continued: “Australia’s 2.2 million small and medium-sized businesses are the beating heart of our economy but are starved of working capital and under-served by traditional lenders who require security.

“By lowering borrowing costs, the proposed fund is a good step in increasing competition between the dominant, big lenders and online, unsecured lenders, such as Spotcap”.

The Council of Small Business Organisations Australia (COSBOA) likewise welcomed the news, with CEO Peter Strong stating: “We congratulate the hovernment, and the Treasurer Josh Frydenberg, on this decision. It’s a well needed game changer for financing of small businesses.”

Mr Strong said that securing access to affordable capital had become the “number one”  challenge for small business owners in Australia, particularly as some banks had “relied solely on past earnings rather than taking future earnings potential into account”.

“As a result, if the business owner doesn’t have a house (or other major asset) to put on the line as security then they are stuck – and Australia misses out on the employment that can be generated by the future growth of these businesses,” he said.

Mr Strong continued: “Small business owners often tell me that the only time they can get a loan is when they no longer need it. Others have told me that they have had to travel overseas to get finance and, using the same business plan as they used in Australia, they get their loan. This was a crazy and damaging situation.”

Mr Strong continued: “It is by no means ‘free money’ but small businesses that are sound and have good growth potential will finally have access to affordable finance.”

Touching on the new growth fund, the COSBOA CEO stated: “Importantly, the Treasurer understands that the announcement would fail if the process of managing the funds is convoluted and complex.

“We, with others, have already been asked to join in designing the system to make sure it is fit for purpose and not made unfit by interference from those who don’t understand our sector. We look forward to working with the Morrison Government, the Treasurer, the Small Business and Family Enterprise Ombudsman and other stakeholders to make these two funds accessible for small business owners and start-ups.”

Prospa removes unfair loan terms for small business borrowers and guarantors

Following an ASIC review, Prospa Advance Pty Limited (Prospa) has changed   loan terms in its standard form small business loan contract to address terms being unfair under the unfair contract terms provisions of the ASIC Act.

The review of Prospa’s contract is part of a broader surveillance by ASIC to examine lenders’ small business loan contracts to reduce the risk of unfair contract terms.

As a result of ASIC’s review, Prospa has made a number of changes resulting in improved terms for borrowers and guarantors. The changes include addressing problematic terms outlined in ASIC Report 565: Unfair contract terms and small business loans, and changes to other terms which could have operated unfairly for borrowers and guarantors.

Prospa has agreed that all customers who entered into or renewed contracts from 12 November 2016 will have the benefit of the changes agreed with ASIC. Prospa will be communicating these changes to its small business customers with the amended contract coming into effect in early October.

ASIC’s surveillance of small business loan contracts is ongoing, and will consider regulatory action where appropriate.

Changes to Prospa’s loan contract

Prospa has agreed to make the following changes to its standard form small business loan contract:

  • amended the early repayment clause so that borrowers can now      prepay their loan early without requiring Prospa’s consent, and removed      Prospa’s absolute discretion whether to provide a discount for prepayment – Prospa will now apply a published Early Prepayment Policy so borrowers  can determine the discounts they they can expect to receive if they do pay back their loan early;
  • amended the ‘unilateral variation’ clause to significantly limit Prospa’s ability to unilaterally vary contracts to specific instances. Prospa has also extended the notice period to 60 days where Prospa intends to vary fees;
  • amended clauses defining events of default to add remediation periods and materiality thresholds and to permit changes to control of the Borrower with the lender’s consent (not to be unreasonably withheld);
  • removed a broad ‘cross-default’ clause which allowed Prospa to call a default under the loan contract due to any default under another finance document related to the loan (for example, guarantee or security document);
  • restricted the borrower’s indemnity to ensure that:

–    the borrower is required to indemnify only Prospa, its employees and agents (and not third parties that are not parties to the contract such as receivers or contractors); and

–    the borrower is not required to indemnify Prospa for losses or costs incurred due to the fraud, negligence or wilful misconduct of Prospa, its employees, officers, agents, contractors or receivers appointed by Prospa;

  • removed an ‘entire agreement’ clause which absolved Prospa from contractual responsibility for conduct, statements or representations made to borrowers about the loan contract;
  • limited the class of people who can provide guarantees under the loan contract to:

–    people who are actively involved in the management of a borrower’s business;

–    if the borrower is a company, people who are directors or shareholders of the borrower; and

–    if a shareholder of the borrower company is a company, directors or shareholders of that company.

  • inserted a 5-business-days’ notice provision to guarantors about:

–    borrowers who are 30 calendar days behind their agreed repayment schedule; and

–    the commencement of legal proceedings against a borrower or the appointment of a receiver.

  • limited the guarantor’s liability so that the guarantor is not liable for any increase in the amount of the loan principal and interest agreed at the start of the loan(but the guarantor is liable for fees and reasonable enforcement costs).
  • inserted a provision to obtain consent of the guarantor:

–    where there is a discharge or release of any security held by Prospa given by the borrower or a guarantor; and

–    where there are multiple guarantors, before releasing a guarantor.

  • limited the actions of lender-appointed attorneys where there is an event of default under the loan contract so that an appointed attorney cannot act in a way that prefers the interests of the attorney over the interests of the borrower or guarantor.

Prospa’s Interest Charges and Late Fees

Prospa charges a factor rate for interest on its fixed term loans. The amount of interest, which can be considerably higher than bank loans, is fixed and disclosed at the outset and does not vary even if the loan term is extended.  The amount of interest is therefore part of the “upfront price” of the loan and is excluded from review under the unfair contract term provisions.

Late payment fees for missed payments are, however, subject to review under the unfair contract term provisions. ASIC will be undertaking further monitoring of Prospa’s charging of late payment fees to assess whether the manner in which the fees are being charged is unfair in practice.

Background

In March 2018, ASIC published REP 565, which outlines changes to small business loan contracts made by the big four banks to comply with the UCT law. This report also provides guidance to the broader small business lending industry.

At the same time ASIC announced that it will also examine other lenders’ small business loan contracts to ensure that their contracts do not contain terms that raise concerns under the UCT law. ASIC is reviewing the contracts of bank and non-bank small business lenders, including Prospa, to check their compliance with UCT law.

Since publishing REP 565, ASIC is also monitoring the big four banks’ compliance with the UCT law. In March 2017, ASIC and the ASBFEO completed a review of small business standard form contracts and called on lenders across Australia to take immediate steps to ensure their standard form loan agreements comply with the law (refer: 17-056MR).

In August 2017, ASIC and the ASBFEO welcomed the changes ASIC required to small business loan contracts by the big four banks (refer: 17-278MR) that have:

  • ensured that the contract does not contain ‘entire agreement clauses’ which prevent a small business borrower from relying on statements by bank officers (for example, about how bank discretions will be exercised)
  • limited the operation of broad indemnification clauses
  • addressed concerns about event of default clauses, including ‘material adverse change’ events of default and specific events of non-monetary default (for example, misrepresentations by the borrower)
  • limited the circumstances in which financial indicator covenants will be used in small business loans and when breach of a covenant will be considered an event of default
  • limited their ability to unilaterally vary contracts to specific circumstances with appropriate advance notice.