‘Predatory’ lenders circle small businesses struggling to pay ATO debts and desperate for cash

‘Predatory’ lenders circle small businesses struggling to pay ATO debts and desperate for cash
  • PublishedMay 25, 2024

Small business owner Mia Li breaks down in tears when she recalls losing her family home.

She made the tough decision to sell her property to save her business that was on the brink of collapse because of mounting debts to the Australian Taxation Office (ATO) and suppliers.

The debt was made worse after she took on a small business loan she didn’t understand came with a big catch.

“We tried everything [we could] to stop [losing the family home], but we had to sell the house first to pay the lender,” she says.

Ms Li imports window frames from China and sells them to local builders, many of whom went bankrupt post-COVID and stopped paying her.

When the cash flow dried up, she panicked.

She couldn’t pay her suppliers and debts owed to the ATO, which she said together had amounted to almost half a million dollars.

She went to a broker that got her a $250,000 loan through a small lender. The cash landed in her account almost immediately.

But Ms Li had no idea the interest rate and fees applied would mean she ended up with another $100,000 of debt and would be in financial turmoil.

Some days, she lives out of the office. Others, with relatives.

“You just can’t sleep,” she says in tears.

Ms Li is among a growing number of family-run-business owners who face hardship after falling prey to online lenders offering them quick cash.

To pay the ATO and creditors, the business owners get desperate and sign up to contracts they don’t understand and which land them with hundreds of thousands of dollars of more debt.

The interest rates on these types of small business loans — which anyone can easily and quickly sign up to online — average more than 100 per cent but in some cases the interest rates and fees charged have been up to 300 per cent.

But while consumers are protected under consumer credit and responsible lending laws, small businesses lack the same protections.

Stories of small businesses falling victim to this type of lending are more commonly being raised with Assistant Treasurer Stephen Jones.

Minister in his work office
Stephen Jones says the federal government has given ASIC greater power to take action against lenders doing the wrong thing.(ABC News: Mark Moore.)

He says the government has given the corporate watchdog, the Australian Securities and Investment Commission (ASIC), greater power to take action against lenders doing the wrong thing.

“Tough times can see some of these dodgy operators come to the fore, and prey on people who are in vulnerable situations. And a lot of the times it’s because they haven’t understood the loan contract,” Mr Jones tells ABC News.

“Had they understood [they would pay] 200, 300 or 400 per cent interest on a small loan over a relatively short period of time, they would have looked for alternatives.

“And I think the big message here is, read the Ts and Cs [terms and conditions] and get some advice. Because you can find yourself turning a bad situation even worse.”

‘This will kill’: Business owners driven to self-harm by debts

Those who deal with small businesses that are in turmoil want the federal government to do more to protect small businesses.

Gavin Waring runs a company called Your Business Angels, which offers small businesses tax advice, and says he often meets business owners when they are in over their heads with debt and suicidal.

An older man stands in an office in Melbourne looking worried
Gavin Waring says he is having to talk small business owners out of suicide. (ABC News: Nassim Khadem)

“2005 was a tough year, I had three [small business owner] suicides in a row in two weeks,” he says.

“We’re now asking clients to see their doctors before they come in.

“This will kill people. I’m serious, this will kill people.”

Mr Waring says he’s having to tell an increasing number of small business owners they are facing bankruptcy. To save the business, they lose everything else.

“What they’re losing first is their dignity,” he says.

“They also face the risk of losing their house.

“They are angry with themselves, like, really angry with themselves that they’re letting people down. They feel that they are letting their families down.”

He says rather than negotiate directly with the ATO, small business owners — often one- or two-person family businesses — take out loans with non-bank lenders in the hope they can keep cash flow going.

And he says they are being preyed on by small fintech lenders, which target vulnerable people using slick marketing.

The lenders, he says, network through broker channels — especially those who front out of legal offices — and often pay high commissions.

“It’s very easy to get a loan, they’ll lend to people who have got loans from other lenders because they know that, in the end of the day, the odd loss they have when someone goes bankrupt isn’t anything compared to the massive profit that they’re getting from all the other loans that they’ve got,” Mr Waring says.

“They [the lenders] can lose 10 to 20 per cent of the loans. It doesn’t matter, they’re going to make a fortune.”

And although consumers are regulated under credit laws and responsible lending laws, there are no equivalent protections for small businesses.

“They [the business owners] have taken these loans on the basis that they behave and think like consumers,” Mr Waring says.

“But because they’ve got an ABN, because they’re in a partnership, they’re a sole trader and a company, it’s open slather — there is no legislation that controls the interest or how they’re charged for this money.”

The loan option was a ‘trap’

The biggest problem is that small business owners like Ms Li are in a rush to get cash to pay off debts owed and don’t understand the contracts they sign come with exorbitant interest rates and fees.

“The broker gave me [loan] options, but the option was a trap,” Ms Li says.

“It was just too much interest.”

George Papageorgiou, who fixes food trucks and other commercial trucks for a living, is another victim of this type of lending.

He found the lender on the internet and soon after took on a loan for $500,000 to pay debts he owed to the ATO and suppliers.

Man stands at his truck
George Papageorgiou says he was in a rush to get a loan and made a mistake. (ABC News: Nassim Khadem)

He thought he was going to see the full $500,000 but the lender took the interest up-front and gave him $380,000.

By the time he’d signed the contract, the damage was done. He’d put up the family home as collateral after convincing his wife to sign up to the loan.We took on a loan that we knew nothing about, basically,” he explains.

“I thought we’re getting the full amount ($500,000) and you could refinance it after a year. But it didn’t work out that way. We’ll probably have to sell the house.”

He says he feels ashamed that he let his family down.

“I had to get my wife to basically to go as a guarantor for me,” he says.

“So you can imagine what situation I have left her in as well. My wife’s not very happy, but she’s very supportive. So once the house goes, the kids will be sad, because it’s the family home.”

Call to bring small business under consumer credit laws

Those in the building and construction sector are common victims and among the worst hit in terms of insolvencies.

March saw a high of 1,137 business insolvencies nationally, up from 968 in February and 555 in January, according to data from the Australian Securities and Investments Commission (ASIC).

Insolvencies were up 37 per cent from the same month a year earlier.

Construction continues to be the worst-hit sector, with 2,370 insolvencies in the year to April 28, compared to 1,751 a year earlier.

The rate of businesses going under is tipped to get even worse, with some expecting it could hit post-global financial crisis levels as the ATO chases small businesses for $34 billion in debt, and the economic situation, including high inflation, bites.

“It’s the double whammy of inflation and tax debt, and really just making poor judgement,” Mr Waring says.

In November, ASIC warned that desperate Australians struggling with the cost of living were being taken advantage of by loan sharks whose small, high-interest loans were pushing them into dire situations.

ASIC’s chair Joe Longo recently told a parliamentary inquiry that lenders were targeting people unable to access mainstream credit, which offered lower fees and rates.

ASIC chairman Joe Longo in Sydney
Joe Longo is worried lenders are targeting vulnerable people unable to access mainstream credit.(ABC News: Joe Longo)

A spokeswoman for ASIC told ABC News that high-cost credit and predatory lending practices to small businesses were one of ASIC’s enforcement priorities for 2024 and that alleged misconduct could be reported to the regulator.

“While consumer lending is regulated under the National Credit Act, ASIC has jurisdiction over business lending under provisions in Part 2 Div 2 of the ASIC Act,” she says.

“These provisions include misleading representations, unconscionable conduct, unfair contract terms and undue harassment or coercion, as evidenced by various outcomes over the years.”

But Mr Waring wants the law changed to ensure that micro businesses — he suggests those with less than $2 million turnover — fall within the tighter consumer law protections.

He says, until then, small business owners will keep falling prey to these fintech lenders.

Minister warns changes could lock businesses out of credit

However, Assistant Treasurer Stephen Jones is reluctant to change the law to give micro-businesses the same protections as consumers.

He fears that doing so could make it harder for small businesses to get loans from banks and perversely result in even more cases of people going to predatory lenders.

“We don’t want to lock people out of credit, but we also want to ensure that they understand what they’re signing up to, and we don’t have unfair and unreasonable contracts,” he tells ABC News.

“If you lift the bar around the responsible lending obligations and you start looking at bringing an equivalence for small business in consumer spending, what you can end up doing is locking small businesses out of mainstream credit markets, and that means they go to alternative lenders, which have these exorbitant and sometimes usurious interest rates attached to them.”

SOURCE: ABCNEWS

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