In the modern economy, whether for business development, asset finance, bridging loans or other funding needs, it seems to be a growing trend in Australia for borrowers to approach non-traditional lenders in an attempt to avoid the comparatively stringent requirements associated with Australia's conventional bank lenders.
The National Credit Code (NCC) and National Consumer Credit Protection Act 2009 (Cth) set out the national framework under which credit agreements are regulated, including under the following circumstances:
- where the lender is in the business of providing credit;
- a charge is made for providing credit;
- the borrower is a natural person or strata corporation; and
- the credit is provided (wholly or predominantly) for personal or household purposes (including for purchases, renovations or refinancing).
The benefit of a regulated loan is primarily that the NCC includes provisions which aim to protect a borrower's rights and interests pursuant to such loan and credit arrangements. It is therefore prudent that a borrower determines whether the NCC applies to their loan.
An "unregulated loan" commonly refers to a loan that is not regulated by the NCC, for example where:
- a lender is a non-bank or private lender;
- the borrower is a corporate entity; and
- the loan is wholly or predominantly for business purposes.
As such, it is crucial that the terms of the loan, including the rights and obligations of both the borrower and lender, are accurately recorded in the form of suitable loan and security documentation.
Generally, the terms of loan and security documentation are found to be onerous on the borrower. In certain instances, obligations can arise at the time of accepting a loan offer, before the borrower has signed any loan and security documents.
In many cases, to mitigate the risks undertaken by the lender, the lender may require that the borrower provides security, which can take various forms, including a charge over the assets of the borrower and/or the guarantor, whether in the form of a mortgage, general security agreement or otherwise. Such security can confer extensive rights and powers in favour of the lender.
Where a borrower has an existing mortgage or security interest registered over its assets, the granting of any further encumbrances over that asset may require the consent of their existing mortgagee or creditor. It is prudent that borrowers consider the terms and conditions of any existing loans to ensure that an event of default does not arise pursuant to those terms.
The reality of business borrowing is that borrowers often transact as a "corporate entity" which normally results in lenders requiring the directors of the borrowing entity to provide a personal guarantee and indemnity as a further layer of protection against the possibility of the borrower defaulting. If you are ever asked to provide a personal guarantee, you will effectively be securing the borrower's obligations under a loan agreement in your personal capacity. In many instances, a guarantee and indemnity may be unlimited. It is important that guarantors fully understand the risks and implications of providing a personal guarantee and signing loan and security documents.
It is important that borrowers and guarantors seek independent legal advice to be able to navigate the complexities associated with business loans and the associated security requirements.
Lenders implement various measures to ensure that borrowers repay debt on time and one way of doing this is by seeking to charge higher interest rates and/or additional fees and charges to incentivise borrowers to satisfy their repayment obligations on time. Generally, costs and charges levied in relation to unregulated loans are found to be higher. It is recommended that borrowers obtain
legal and financial advice and ensure that the costs set out in any loan documentation are appropriately chargeable by a lender and acceptable to the borrower.
The importance of engaging experienced legal practitioners
Many loan agreements are drafted in favour of lenders and tend to be riddled with provisions which potentially place borrowers and guarantors in troubled waters in the event of default. It is prudent that all prospective borrowers and guarantors seek legal and financial advice prior to signing loan and security documents, to mitigate their risk and satisfy themselves that the documentation is fair and reasonable. More importantly, borrowers and guarantors should fully understand their rights and obligations as well as those of the lender so that they are aware of the consequences associated with default.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
