NAB simplifies loan contracts for small firms

National Australia Bank is simplifying its lending contracts for small and medium-sized businesses.

Sharon Cook, left, and Leigh O’Neill. Picture: Hollie Adams

National Australia Bank is simplifying its lending contracts for small and medium-sized businesses, cutting back terms and conditions by a third and dropping many default clauses.

The bank yesterday announced an overhaul of its standard contracts for small business loans, estimating that the changes would benefit more than 130,000 small and medium-sized business owners in Australia.

The changes will see documents of more than 110 pages replaced by contracts of just over 40 pages, fewer instances where customers can be deemed to have defaulted on loans, and a 30-day grace period for customers who have defaulted to try to work out a repayment plan.

“We want to make our contracts much more user-friendly and fairer for our customers,” NAB’s chief legal and commercial counsel, Sharon Cook, said yesterday.

“We are totally transforming our small business lending contracts. Small business customers are a huge part of our business.”

Ms Cook said the new contracts would apply to customers with current loans as well as those applying for new loans.

“We have got rid of a third of the terms and conditions in the contracts, which has been a remarkable feat,” she said.

How much do small businesses borrow

She said the main changes were that there were far fewer events of default listed in the contract, and they were much clearer, so customers had a better idea of their obligations.

She said the bank would also be allowing a longer period for businesses to fix their problems when things were going wrong, rather than being put into default.

Financial indicator covenants were also being removed from most lending contracts for small business lending.

NAB’s executive general manager of small business lending, Leigh O’Neill, said the new simplified, easier-to-read contracts would not increase the risk of lending to small businesses.

She said many of the terms in the contract were not being used by the bank, so their removal would not add to the lending risk.

“We have gone into this with our eyes wide open,” Ms O’Neill said.

“The reality is that we we’re not relying in some of the things in the contract and they didn’t reflect the nature of the relationship we wanted to have with our ­customers.”

The changes have been made in close consultation with the Small Business and Family Enterprise Ombudsman, Kate Carnell, who issued a report after an inquiry into bank lending practices to small business late last year.

The inquiry recommended that banks put in place a new small business standard form contract for loans below $5 million, which was shorter and in plain English, by December this year.

Ms O’Neill said small businesses in Australia were continuing to borrow.

But she said NAB was finding that many wanted to be able to take out smaller loans more often, to meet specific business needs, rather than looking for one big loan.

She said the bank’s new online unsecured lending product, QuickBiz, was proving popular with small business, allowing for online approval for loans of up to $50,000.

The bank has plans to increase this to $100,000.

The changes come after NAB announced in April that it would not be using financial indicator covenants in most loan contracts for customers with total business lending of less than $3m.

The Carnell report into the law and practices surrounding small business lending found that there was an “almost complete asymmetry of power in the relationship between banks and small business borrowers”.

It said small businesses suffered from “extremely complex, one-sided contracts that yield maximum power to banks to make unilateral changes whenever they like and without the agreement of borrowers”.

It also said there were “inadequate time frames around key loan milestones” that left borrowers vulnerable.