Loan default consequences hit home

Financial Ombudsman Susan Taylor has warned small business owners to seek advice before applying for business loans using their homes, trusts or parents’ 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.

“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.”

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, says 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.

“If 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.”