What responsible lending means when the loan is for a business

Many owners assume that a lender cannot legally give them more debt than they can repay. That is true of a home loan or a personal loan. It is not generally true of a loan taken out for a business, and the gap catches people out.

This guide explains what “responsible lending” means in practice for business borrowers, where the legal protections come from, where they stop, and how to cover the gap yourself. It is written for owners who want a clear picture, not a legal brief.

What does responsible lending mean in the first place?

In Australian law, the phrase refers to a set of obligations on lenders who provide consumer credit. In broad terms, the lender must make reasonable inquiries about the borrower’s requirements and objectives, take reasonable steps to verify the borrower’s financial situation, and not provide credit that would be unsuitable. Those obligations are in the National Consumer Credit Protection Act.

The Act is aimed at credit for personal, domestic or household purposes. A loan made wholly or predominantly for business purposes generally sits outside it. That does not mean business lenders do not assess you. It means the law does not require them to apply the consumer test, and you cannot lean on it if a loan turns out to be too big.

Why do lenders still assess my repayment ability?

Because losses cost them money. A bank lending $300k to a business will look at cash flow, history and security because it wants repayment, not because a statute demands a particular process. Our guide on what lenders mean by serviceability describes the assessment.

Different lenders weigh the pieces differently.

• Banks lean on documented profit and repayment capacity.
• Online lenders lean on bank transactions and recent turnover.
• Property-secured private lenders lean on the value of the security and a credible exit, and may pay less attention to monthly serviceability.

That last point is the one to remember. A property-secured loan may be approved on the strength of the security alone. That is a legitimate way to lend, but it means approval is not evidence that you can afford it. Our page on how second mortgages get approved shows how those assessments run.

What protections do business borrowers actually have?

Several, and they are more useful than they look at first glance.

Unfair contract terms

ASIC’s information on unfair contract terms says the protections cover standard form contracts with small businesses, with business loans and broker agreements named as examples. A business qualifies if it has fewer than 100 employees or turnover below $10m, and for financial products the upfront price must not exceed $5m. An unfair term is treated as void, and providers can be fined for proposing, applying or relying on one. ASIC’s examples include a $5,000 default fee on a single missed $20,000 payment and a lender that could change any term on five days’ notice.

The Banking Code of Practice

Banks that subscribe to the Code make commitments to small business borrowers. The 2025 version, in force from 28 February 2025, applies to business customers with aggregate borrowings up to $5m. Reported changes include a requirement to meet a guarantor without the borrower present, unless independent legal advice has been given, and 30 days to fix a default before a bank demands full repayment or enforces, subject to exceptions. Check the Code itself for the current wording.

Unconscionable and misleading conduct

ASIC notes that commercial borrowers have protections under the ASIC Act, but also that proving unconscionable conduct in commercial lending is difficult and generally needs evidence of improper advantage of a power imbalance. Treat this as a backstop.

AFCA

AFCA can consider complaints from small businesses about commercial lending, but only about member firms, and within its limits. Lenders that only provide commercial credit are not legally required to join, so check. We cover the steps in how to complain about a lender.

How does the business purpose declaration work?

Many lenders ask you to sign a declaration that the loan is for business use. It is a simple form with large consequences.

• If the declaration is accurate, the lender can treat the loan as commercial.
• If the money is partly or mainly for personal use, the declaration may be wrong, and the consequences can include losing consumer protections and creating problems with the lender later.

Be exact about what the funds will do. If part of a loan will clear a personal credit card, tell the lender. A mixed-purpose loan is sometimes assessed by what it is “predominantly” for, and the lender needs the true picture to structure it correctly.

What is the risk when the law doesn’t require an assessment?

The risks are practical, not theoretical.

• Over-borrowing, where the loan is bigger than cash flow can carry, leading to refinancing at worse terms.
• Stacking, where multiple loans with frequent repayments squeeze working capital. See business loan stacking.
• Risk to the family home, when a business loan is secured on personal property or guaranteed by a director. Read risks of using your home as business security.
• Panic borrowing, where a deadline drives a decision the owner would not make with time. Our guide on how to avoid panic borrowing offers a counter.

Illustration: a transport operator is offered $250k against a house on the strength of a valuation, with repayments of interest only for six months and a balloon at the end. The lender never asks about the operator’s next 12 months of contracts. The loan is legal. Whether it is responsible depends on the exit, which the operator needs to test.

A ten-minute responsible-lending test you can run yourself

Before you sign, work through these questions on paper.

1. Can the business make every repayment from normal trading if revenue falls by a fifth for three months? Use the debt service coverage ratio calculator as a rough guide.
2. What is the exit? If the loan is short term, how exactly is it repaid: a sale, a refinance, a contract payment? Our guide on a good exit strategy for a short-term loan helps.
3. What could I lose? List any guarantees and the property that secures the loan.
4. What happens if I miss one payment? Find the default fee, the notice period and any cross-default clause.
5. Is the money going where I declared? Confirm it matches the business purpose declaration.
6. Would I take this if the deadline were a month later? If not, what does the deadline cost?

Spent ten minutes and still unsure? Describe the figures to us on the enquiry form and a person will look at whether the structure fits. Sending it does not involve a credit check.

What does a careful lender do that the law doesn’t require?

Good lenders often go beyond the minimum. Signs of one include asking about your forward contracts, not just last year’s profit, explaining fees in plain terms, giving you time to read the letter of offer, and encouraging independent advice on guarantees. Our guide on reading a letter of offer shows what to look for.

A lender who rushes you, resists independent advice, or pushes the security hardest rather than the repayment story is showing you something.

Making the next step a careful one

If you are weighing a loan and want it to be one the business can actually carry, that is exactly the kind of conversation we like having. Our short enquiry form takes around a minute, doesn’t trigger a credit check, and doesn’t send your details to a crowd of lenders. A real person reads your situation and calls. Give us accurate numbers, including the awkward ones, so that the structure we discuss is one that fits the business you really run.

Check whether a loan would fit →