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If you are a small business owner, a business credit loan may be the most accessible form of financing available to you. Business credit loans are term loans under which a creditor lends you money. You are obligated to repay that money with interest following the terms of your business credit contract. The business credit market in Australia has grown significantly this year. With historically low interest rates, it is cheaper to hold debt now than ever before. 

If you are accessing financing through a business credit loan, you should carefully study the commercial terms and your legal obligations under the business credit contract. Unfortunately, it is common for business owners to focus on commercial terms while overlooking legal obligations. However, understanding your legal obligations is essential for many reasons, including identifying and removing unfair terms from the contract. 

This article provides three questions you should ask yourself to determine if your business credit contract has unfair terms. 

The Law on Unfair Terms

The law prohibits creditors from providing credit to borrowers on unfair terms where the loan contract is a ‘small business contract’.  These laws exist to protect borrowers from complying with unfair terms. They also recognise the general power disparity between creditors and borrowers. 

Your business size will impact the laws that apply. Your business credit contract is a small business contract if at least one party of the business credit contract is a business that employees fewer than 20 people and either:

  • the upfront price payable under the contracts is not over $300,000; or 
  • the duration of the contract is more than 12 months, and the upfront price payable under the contract does not exceed $1,000,000. 

If a court deems any terms in a small business contract to be unfair, it will remove those terms from the contract, and the remainder of the contract will continue in full force and effect. However, if the entire contract is deemed to be unfair, then the entire contract is void. 

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Does My Contract Have Unfair Terms?

When you review your business credit contract, you should ask yourself these three questions. If the answer to any of these questions is yes, then you should consider raising this with your creditor and, if possible, negotiate to redraft these terms.

1. Are the Terms of the Contract Transparent?

A term is transparent if it fulfils several criteria. It must be in reasonably plain language, legible, presented clearly and readily available to any party affected by the term.  For example, suppose a term places significant legal obligations on you. If that term is drafted in legalese, presented in tiny font, and the other party did not point out the term to you, the term may not be transparent.  When reviewing the business credit contract, note the terms you do not understand and have your lawyer explain them to you. If necessary, ask your creditor to make the relevant terms more transparent. 

2. Are There Significant Imbalances Between You and the Creditor When it Comes to Rights and Obligations?

Terms that create a significant imbalance between you and your creditor are often unfair. A term that provides rights to your creditor unilaterally without giving the same rights to you as the borrower is an example of a term that creates an imbalance. Likewise, perhaps a term requires you to provide indemnity to creditors. This is despite the creditor being better placed to limit its loss. This is an example of a term that creates an imbalance.  If your business credit contract has such terms, you should consider requesting the creditor to explain why such terms exist. Then, if necessary, ask your creditor to amend those terms to make them more balanced. 

3. Are the Terms of the Contract Reasonably Necessary to Protect the Legitimate Interests of the Parties? 

Contractual terms should protect the legitimate interests of the parties to the contract. If there are terms unnecessary to protect such legitimate interests but place significant detriment on the other party, those terms may be unfair. 

‘Legitimate interest’ and ‘reasonably necessary’ will vary depending on the context of the contract, the parties, and other factual circumstances around the contract. One way to assess whether a particular term is reasonably necessary to protect a party’s legitimate interest is to ask what would happen to that party if they did not enforce that term. If the alternatives available to that party are not detrimental, then that term may not be required to protect their legitimate interest.

In the context of business credit contracts, you often see terms that state that any breach of the credit contract could give the creditor the right to require the borrower to repay the loan in full. This clause is a clear example of an unfair term. It puts one party in significant detriment and does not protect the other party’s legitimate interests. A minor breach of the business credit contract is unlikely to cause detriment to the creditor to the extent that it warrants the borrower to be obligated to repay the loan amount in full. 

Key Takeaways

Business credit loans are one of the most used financing options for small businesses. If you are in the process of acquiring a business credit loan, it is essential to consider both the commercial and legal terms of the contract. You should ask yourself three questions while reviewing the terms of the business credit contract. Determine whether:

  1. the terms of the contract and the entire contract are transparent;
  2. there are significant imbalances between you and the creditor when it comes to rights and obligations; and
  3. the terms of the contract are reasonably necessary to protect the legitimate interests of the parties.

For more information on the unfair terms in contracts, contact LegalVision’s banking and finance lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What unfair terms should I look out for in a business credit contract?

Look out for terms that create a significant imbalance between you and the creditor. Additionally, look out for terms that are disproportionate to the legitimate interests of the creditor. These are likely unfair terms.

What should I do if a contract I am offered has unfair terms?

Firstly, you should look over the terms with a legal professional. Then, ask the creditor why they have included the term. See if you can amend the terms to make them fairer.

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