Banking News

CBA simplifies small business lending contracts

(28 April 2017 – Australia) Following findings from Small Business and Family Enterprise Ombudsman, Kate Carnell’s Small Business Loans inquiry, the country’s largest bank has announced measures to simplify its business lending standards.

Commonwealth Bank (CBA) said in a statement that it is “making a range of changes to simplify small business lending contracts and provide greater certainty to customers.”

According to the bank, the changes address a key concern raised in Inquiry report about financial indicator covenants.

Commonwealth Bank Business and Private Banking Group Executive Adam Bennett said: “We are simplifying our small business loan terms and conditions to make it easier for our customers. For almost all of our small business loans, financial indicator covenants will no longer be included in loan contracts and therefore will no longer be a possible cause of default.

“Even though we very rarely used these covenants as a reason to foreclose a loan, this means that we will be removing all references to them in our small business loan contracts where our exposure to the customer is below a value of A$3 million. We are doing this for all new and existing qualifying customers to provide greater transparency and certainty for small business.”

Existing CBA customers will be advised of the removal of these covenants to their loan contracts while future loan contracts will be simplified to make it easier for new customers to understand the loan contract.

“This means customers will have more certainty and control so they can avoid defaulting on their small business loans,” Bennett said.

The bank said these changes will “benefit 95 percent” of its small business customers.

The changes come as East & Partners' SME Transaction Banking report shows that Australian SMEs increasingly perceive their primary banking relationship as transaction orientated. The proportion of SMEs who primarily interact with their banks for credit needs fell below 50 percent from as high as 69 percent in 2013.

According to the research, the move away from lending relationships is magnified by a marked increase in SMEs’ intention to switch transaction banks in the next six months. One in four business owners declared “highly probable” or “definite” intentions to move their transactional business elsewhere in the first half of 2017, representing a 50 percent increase over the last 3 years.

“The small business banking landscape is rapidly changing,” said Martin Smith, Head of Markets Analysis at East & Partners.

“As businesses and business owners become less tied down to their primary provider, whether it be via personal relationships, credit security or funding availability, they will seek out alternative account services and cash management providers based on price competitiveness, ease of use, tailored products, and technological features.”

“Although small businesses currently bank holistically, they will soon enough spread their transaction banking needs across multiple providers as new digital technology and an increased focus on account portability lowers barriers to entry – particularly in the lending and payments markets.”

“As such, banks need to act, and act fast. Smaller, more nimble firms, including non-Big Four, alternative finance providers and fintechs are quickly encroaching on the long under-valued small business market,” he said.