December is almost upon us as I draft this update on what has been dubbed the ‘Anti-small business bill’ the National Consumer Credit Protection Amendment (Credit Reform Phase 2) Bill 2012, this is also the anniversary of releasing the Bill just prior to Christmas 2012.
This Bill proposed legislation to regulate small business credit under the National Consumer Credit legislation. Doing so would mean a higher set of minimum standards from lenders and finance brokers dealing with small business owners seeking credit because currently commercial finance, regardless of the loan or borrower size, is largely unregulated with the legal notion of caveat emptor (“buyer beware”) operating. This makes an assumption that because the finance is commercial the borrower should be sophisticated enough or well enough resourced to protect their own interests. Understandable for mid-market and larger firms but questionable for thousands of small businesses that have to provide all of the same mortgage security as a home buyer but are afforded none of the protection from questionable lending practices.
Higher standards are not a bad thing but increasing standards and any extra compliance requirements always carries a cost which is going to be passed to borrowers.
Back in December 2012 Graham Doessel, CEO MyCRA Credit Rating Repair, opposed the Bill but simultaneously made the observation that “There is a gaping hole in the basic rights afforded to commercial credit file holders before recovery is commenced, and this needs to dealt with” a sentiment shared by Elcano and an issue that would automatically have been addressed under the proposed legislation changes.
In early 2013 Treasury received 17 submissions (3 confidential) on the proposed legislation amendments with most of those coming from lenders and law firms, presumably at the request of lenders not otherwise named, and industry associations. There was significant opposition to the proposal to include small businesses and most of this opposition apparently originating from lender concerns for Australian small businesses and their ability to access funds.
Unless hidden behind a veil of confidentiality there was no submission from a small business representative association or body, I would have liked to review their opinions on the matter. With all voices apparently in dissent Treasury withdrew the small business extension to the Bill with that component to be deferred for later review.
Going back to lender and industry association concerns for small businesses having access to credit reduced and lending costs increased I thing this at least worthy of greater review should the issue come up again.
Lenders make money from loans and while the margins are not as great as they used to be in home loans that is because of competition. Lenders don’t compete very hard for most small business lending, not because the risks are too high or unknown. Those lenders have been doing this for quite some time, have large staff including some very smart mathematicians and have worked out risks and, arguably, more than compensate for such risks. Particularly given most small businesses cannot get finance unless it is completely covered by security on low loan-to-value ratios. The lack of competition is because over 90% of small business owners just go straight back to their existing bank for any new finance and don’t even look at alternatives. Why compete for the loan when 90% of your transaction account customers will only look to you for finance.
Of course there has been a change of government since the small business extension was withdrawn but this issue has not been announced as one of interest or concern to the coalition government. Will we see it again in 2014? Sadly I don’t think so, not because I am advocating for it but because it needs really and impartial review of the implications and possible benefits to small business borrowers against the real projected costs of doing so.