NAB “first off the mark” with shorter, plain English loan contracts for small businesses

Small Business Loan

National Australia Bank’s decision to introduce shorter, plain English loan contracts for small business borrowers has been welcomed by the Australian Small Business and Family Enterprise Ombudsman.

According to the bank, more than 130,000 business owners will benefit from the complete overhaul of its existing business standard loan form contract, which involved simplifying contractual clauses, the introduction of plan English sentences and a major reduction in document length, including terms and conditions.

“What we have now is a transparent, user friendly document that is easy to read and much shorter in length,” NAB Executive General Manager, Business Direct and Small Business, Leigh O’Neill said in a statement on Friday. “We consulted widely with industry and customers. Essentially, if the language didn’t make sense to them, we worked through a better solution together.”

The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell said steps taken by NAB to simplify mall business loan contracts were positive.

“My small business loans inquiry recommended this in December last year and called for implementation by July 2017,” she said.

“The inquiry report recommended that where a small business had met loan payments and acted lawfully, the bank must not default a loan for any reason. The report also said conditions must be removed where banks could unilaterally value existing security assets during the life of a loan; and not invoke financial covenants or catch-all ‘material adverse change’ clauses.

“I applaud NAB for being first off the mark and urge other banks to follow. It shouldn’t have taken so long, but we finally have a situation where banks will be treating small business clients as partners and share some of the risk. Currently the contractual relationship is one-sided and unfair.”

NAB stated that is was no longer using financial indicator covenants in most loan contracts for new and existing small business customers with total business lending of less than $3 million in April 2017; however, the Ombudsman said it would be disappointing if this change wasn’t applied by all lenders to loans above $3 million.

“The banks’ own independent expert adviser on the ABA Code of Banking Practice review, the Financial Ombudsman Service and the Government’s response to the Ramsay review on external dispute resolution have all identified a credit facility of at least $5 million is an appropriate threshold,” Carnell said.

“I’ll continue talking to the government, opposition, crossbench MPs and the banks about raising the threshold to $5 million.”

NAB Chief Legal & Commercial Counsel Sharon Cook said NAB is working with the wider banking industry, ASIC and customers to address concerns raised in the Small Business and Family Enterprise Ombudsman Small Business Loans Inquiry report. Meanwhile, O’Neill called on levels of government and the business community to “take action on establishing a single, clear definition for small businesses” because “the complexity of having multiple definitions…makes it tough for their business to succeed”.