2017 is turning out to be an important year for SMEs in Australia. The financial pressures that small businesses have been operating under for the past decades are finally easing, and doing so in more ways than one. The Australian Small Business and Family Enterprise Ombudsman’s (ASBFEO) payment times inquiry found that Australian small businesses have suffered significantly from chronically late payments from much larger clients. The contract terms that businesses often had to deal with to manage these cash flow interruptions have, in some cases, made their lives even more difficult.
Big businesses have begun to take action to improve the issue of payment times on their own, even as the government looks into legislative solutions. Similarly, the Australian Securities and Investments Commission (ASIC) has now announced that, after 9 months of working with the big four banks on addressing Australia’s 2015 Unfair Contract terms legislation, they have agreed to remove a number of “unfair terms” from their contracts.
How loan terms are changing
Banks are instituting several major changes to make borrowing safer and fairer for small businesses. These changes are designed to protect businesses from bad-faith practices by lending institutions that were previously possible.
No more “entire agreement clauses”
In the future, banks won’t include clauses that try to absolve them of any responsibility for statements made outside the written contract itself. This means they could be held liable for misrepresenting themselves to a client.
Limits on indemnification clauses
The reach of indemnification clauses will be scaled back. Specifically, this means clients won’t be forced to financially cover losses and costs resulting directly from any misconduct by their bank.
Cutting material adverse change event clauses
In the past, banks could justify a default with any non-specific negative change by using the material adverse change event clause. By removing these, banks are establishing that they’ll need a concrete reason to terminate a loan.
Contract variance protections
Banks’ abilities to vary contracts will be limited to specific situations. Most importantly, clients who object to any such changes must be allowed 30-90 days to exit their contract. This protects businesses from being held to agreements that they may never actually have explicitly agreed to.
What does this mean for SMEs?
Fundamentally, these changes will make it easier and safer for small business owners to manage debt. They’ll be far less likely to be forced to deal with unexpected additional costs, and they’ll be better protected from destabilising and predatory practices by their lending institutions. That, in turn, will make it more attractive for small businesses to work with these lenders to finance their operations.
Of course, that doesn’t mean financing shouldn’t still be approached with care. Most of the financial issues that small businesses deal with are not related to unfair loan terms. While business owners will be treated more fairly with these improved contract terms, they’ll still need assistance in finding and evaluating the financing options they need to solve their cash flow issues.
Financing with care
It’s always a good idea to work with a financial expert to determine whether financing is an appropriate solutions to a cash flow interruption, and how to best go about it. At Fifo Capital, for example, all our clients work with a dedicated long-term representative, whose job it is to understand our clients’ needs, and to develop customised solutions for them. We provide a variety of alternative cash flow solutions that are ideally suited to some situations where traditional loans might be problematic or risky. For example…
Late payment issues
Businesses that are trying to deal with irregularities in their cash flow due to late client payments might be tempted to take out a loan, or to open a line of credit to provide a buffer and provide capital for short-notice expenses. However, that would generally be significantly more expensive than simply dealing with the problem directly by using customer payment plans or invoice financing. Both of these solutions can regulate your business’ cash flow, and eliminate the headache of chasing after clients for late payments.
Stock shortages
It can feel overwhelming when you have more customers than you can stock products for. Whether it’s because of a holiday, the weather, or a single high-demand customer, you need to stock up quickly. Businesses that are already fully leveraged are likely to run into a problem at this point. You need to sell products in order to earn the capital you need to purchase those products in the first place. By using a stock loan, which is generally secured against the stock purchased with the loan, you can circumvent this issue entirely.
The big four banks have announced some very welcome news for small business owners in Australia by making their contracts fairer for clients. However, it’s important to remember that financing your business successfully is about much more than just getting a fair contract.
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