AFCA Alerts Small Businesses to Dangers of Unregulated Lending

In the financial year 2024-25, AFCA closed 2,063 small business complaints related to finance, with 21% of these cases deemed outside its rules. A significant portion of these complaints involved financial firms that are not members of AFCA, highlighting a critical gap in consumer protection for small businesses.

Under current regulations, not all small business lenders are required to be AFCA members. This includes certain asset leasing businesses and online or private equity lenders that exclusively serve business customers. Consequently, small businesses that secure loans from these non-member entities may find themselves vulnerable, lacking access to external dispute resolution mechanisms if issues arise.

Suanne Russell, AFCA's Lead Ombudsman for Small Business, emphasized the importance of due diligence when selecting a lender. She noted that if a small business lender is not a registered member of AFCA, the business cannot lodge a complaint with the authority if problems occur, leaving these business owners exposed to potential risks.

The rise in complaints underscores the mounting pressures faced by small business owners, from cash flow challenges to financing difficulties and rising operational costs. Notably, service quality emerged as the top issue, with a 43% increase in complaints, followed by financial firms' failure to respond to assistance requests and incorrect fees or charges.

AFCA urges small business owners to verify whether a prospective lender is an AFCA member before entering into any financial agreements. This proactive step can provide an added layer of protection, ensuring access to independent dispute resolution services if needed.

For lenders not yet affiliated with AFCA, especially those servicing small businesses, the authority encourages membership to offer their clients access to external dispute resolution mechanisms. This move not only enhances consumer trust but also aligns with best practices in financial services.

In conclusion, while the availability of diverse lending options can be beneficial for small businesses seeking capital, it's imperative to exercise caution and conduct thorough research. Engaging with regulated lenders who are members of AFCA can safeguard businesses against potential pitfalls, ensuring that they have the necessary support and recourse in the event of disputes.