The fine print on a business loan: nine clauses worth reading twice

Nobody enjoys forty pages of loan contract. Yet a surprising amount of the grief owners report to lenders, accountants and dispute services comes from a sentence on page 31 that nobody read, not from the price on page one.

You don’t need to read every line with equal care. You need to know which lines move your risk, and to be comfortable asking about them. This guide walks through nine clauses, what the law will and won’t do for you, and a method for getting through a contract in an evening.

What does the unfair contract terms law actually protect?

Since November 2016, a term in a standard form small business contract for a financial product can be challenged as unfair. Two changes since then matter for borrowers, according to ASIC’s small business guidance:

• Who counts as small. A business with fewer than 100 employees when the contract is signed, or turnover under $10m in its last income year. The upfront price cap for financial products and services is $5m, with interest ignored when applying that cap.
• What happens to a bad term. A court can declare it void. From 9 November 2023 a lender can also face penalties for proposing, applying or relying on an unfair term.

A term is unfair when it creates a significant imbalance between the parties, isn’t reasonably necessary to protect the lender’s legitimate interests, and would cause detriment if relied on. That’s a high bar, and it isn’t designed to rescue you from a bad bargain.

Here is the part most guides skip. The test generally doesn’t reach the main subject of the contract or the upfront price, which means the loan amount, the term and the establishment fee you were shown at signing sit outside it. Contingent charges, such as default fees, sit inside it. ASIC’s own illustration is a $5,000 fee for a single missed monthly repayment on a secured loan to a business with a good record: likely unfair if it goes well beyond what the lender needs to protect itself.

So the law is a safety net for the surprising, one-sided terms. It isn’t a reason to skip reading. Banks and non-bank lenders alike have mostly cleaned up their documents, and a well-run bank contract is usually clear and fair. The risk is the unusual clause, not the whole document.

Which nine clauses should you read first?

Skip the definitions and boilerplate on the first pass. Find these.

1. Events of default

This lists everything that lets the lender call the loan. Missed repayments are the obvious entry. Look for the quieter ones: failing to lodge a BAS on time, an unpaid ATO debt above a set figure, a judgment against you, a change in ownership or control, or the sale of a key asset. Our guide to acceleration clauses explains what happens when one is triggered.

2. Cross-default

A cross-default clause says that a default on any other debt, to anyone, is a default here. It’s common and reasonable. But check whether it’s triggered by an actual default or by a mere dispute, and whether it extends to related entities, your trust or your guarantors.

3. Review events and material adverse change

Some facilities let the lender reconsider the whole arrangement if something “materially adverse” happens to your business, or if the lender “reasonably believes” your position has deteriorated. Ask what the lender treats as material, and whether the clause lets it demand repayment or only restricts further drawing.

4. Variation rights

Who can change what, and with how much notice? A clause allowing the lender to alter fees to reflect a published benchmark moving is one thing. ASIC’s example of a lender that can change any term in unspecified ways on five days’ notice is another: you’d have no realistic way to exit before the change bites. Look for a notice period long enough to refinance, and a right to leave without penalty if a change goes against you.

5. Fees on default, late payment and early exit

Find the fee schedule and compare it with the lender’s actual costs. Check whether early repayment triggers a break cost or an exit fee, and how it is calculated. Our guide to early repayment savings and penalties shows how to test the numbers.

6. Security wording

“All monies” or “all present and future obligations” language means the security you give for this loan also secures other debts you owe the lender, now or later. That can matter when you refinance one facility but leave another. A general security agreement over business assets deserves its own read; see what a GSA is and why lenders want one.

7. Guarantees and indemnities

If a director or relative is a guarantor, the guarantee is a separate contract with its own traps: unlimited amounts, continuing liability after the loan is refinanced, and waivers of rights the guarantor would normally have. Guarantors should be told to take their own advice. See business loans and personal guarantees.

8. Reporting duties and covenants

Many loans require financial statements by a date, a minimum cash balance, or a ratio such as debt service cover. Missing a reporting date can be an event of default even when you’re paying on time. Put every date in your calendar when you sign. The loan covenant page explains the usual ratios.

9. Conditions before and after drawdown

Conditions precedent are things that must be done before the money moves: insurance certificates, searches, valuations, signed guarantees. Missing one can stall a settlement. Our guide to conditions precedent lists the common ones.

How can you read a contract in an evening?

A method beats good intentions.

1. Get the whole package. The letter of offer, the general terms and conditions, the security documents and any guarantee. Fees are often in a separate schedule.
2. Search for the nine topics by keyword on a PDF: “default”, “vary”, “review”, “adverse”, “fee”, “all monies”, “report”.
3. Highlight three things per clause: the trigger, the lender’s right and your remedy.
4. Write your questions down in plain language, one per clause, and send them in one email so you have the answers in writing.
5. Compare against the offer. The letter of offer should match the contract on amount, term, fees and security. Differences are the first things to raise. Our guide to reading a letter of offer shows the line-by-line check.

If a lender is slow or evasive when you ask what a clause means, take that as information.

Not sure what structure you should be looking for in the first place? Tell us what you’re funding and a person will talk it through before you have a contract in front of you.

A worked example: the clause that cost a cafe owner a week

Consider an illustrative cafe owner with a $90k equipment and working capital facility. Repayments are on time. In March the owner’s accountant lodges the BAS three days late because of a software outage.

The contract lists late lodgement of tax returns as an event of default, with a seven-day cure period in the fine print. Because the owner had noted that cure period when reading the contract, a short email to the lender with the lodgement receipt closed the matter within a day.

Change one detail: the clause has no cure period and the lender can act immediately. Nothing bad has to happen, but the owner now knows the exposure, can ask the lender to add a cure period before signing, and can tell the accountant that BAS dates matter for this facility.

The skill here isn’t legal. It’s noticing which obligations in your business could trip which clause.

Which questions turn vague clauses into clear ones?

Ask these in writing:

• What exactly counts as a “material adverse change” for my business?
• How much notice will I get before any fee or term changes, and can I repay without penalty if I disagree?
• Is there a cure period for each default event, and how long is it?
• Does the security for this loan also secure my other facilities with you?
• Which dates, ratios or reports must I meet, and who do I send them to?
• What is the total I would pay to repay this loan in full at month 12, in dollars?

For the full list, see questions to ask a business lender before you sign.

What if the clause is a deal-breaker?

Start by asking for a change. Lenders, particularly banks, will often adjust a cure period, a notice period or a reporting date, and some terms are negotiable even for small facilities. Our guide to business loan terms you should negotiate has a realistic list.

If the lender won’t move, you have three choices: accept and manage the risk, find a different structure, or walk away. If you’ve signed already, raise the issue in writing, escalate to the lender’s dispute team, and consider AFCA. AFCA and small business disputes explains who can lodge and when.

Before you sign anything, check the loan itself

Reading the contract is half the job. The other half is making sure the loan suits the purpose, the cash flow and the security you’re offering.

If you’re comparing options, or a lender has handed you a contract that makes you uneasy, the enquiry form is a quick way to get a second pair of eyes on the shape of the deal. It takes about a minute, and asking doesn’t touch your credit file. We don’t pass your details around to a long list of lenders. A real person reads what you’ve written and calls you, so the amount, purpose and security you enter should be accurate: that’s how we match you to the right kind of finance first time.

Ask us to look at your options →