Business loan agreement: what to check before signing
Before you sign a business loan agreement, check the clauses that decide what happens when trading dips. They are the financial covenants, the default events, the variation power, the indemnity, the default fees and the director guarantee. The rate sets the cost in a good year. These clauses decide whether the lender can call the loan in a bad one.
The law treats them differently, too. The unfair contract terms rules don't test the term that sets the upfront price. They can apply to default, variation and other terms that fall outside the statutory exclusions. ASIC has already shown what that means in a small business loan.
Does the unfair terms law cover your business loan contract?
A business loan is a financial product. Its unfair contract terms rules sit in section 12BF of the Australian Securities and Investments Commission Act 2001 (Cth), the ASIC Act. They are not in the Australian Consumer Law.
For a contract entered into or renewed on or after 9 November 2023, the current small-business coverage tests are all 3 of the following:
It's a standard form contract. The lender prepared it and offered it largely on a take-it-or-leave-it basis. If a party alleges it is standard form, it is presumed to be so unless proved otherwise. Negotiating minor terms or choosing from pre-set options does not necessarily change that.
You're a small business. At entry, your business employs fewer than 100 people or its turnover for the previous income year was under $10 million. The statutory employee-counting rules apply.
The upfront price is $5 million or less. The cap includes the principal and disclosed establishment fees; interest is disregarded for this coverage calculation.
Earlier contracts require a separate timing check. The strengthened rules also apply to terms added or varied on or after 9 November 2023; do not assume every older agreement is covered by the current regime.
ASIC's unfair contract term protections page sets out the test. A term is unfair if it meets 3 tests. It would cause a significant imbalance in the parties' rights. It isn't reasonably necessary to protect the lender's legitimate interests. And it would cause your business detriment if applied.
Which terms can be challenged?
Section 12BI excludes terms defining the main subject matter or setting the disclosed upfront price. It also excludes terms required or expressly permitted by law, and specified terms operating through other laws. Interest is part of the upfront price for this purpose, even though it is disregarded for the $5 million coverage cap.
Other terms can be assessed if the contract is covered; they are not automatically unfair. Section 12BH lists examples that may be unfair, including certain one-sided variation terms. A court considers the statutory tests, transparency and the contract as a whole.
An unfair term can be void, and the strengthened rules can also attract civil penalties. That does not mean a borrower should simply stop complying: get advice on the particular term and available remedies.
The tables and clause rewrites below are illustrative commercial requests, not minimum legal entitlements or ready-to-sign drafting. The proposed 5-, 30- and 60-day periods, fee limits and guarantee limits must be negotiated and checked against the whole facility and security documents.
What ASIC found in small business loan contracts
In 2017, ASIC and the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) pressed the big four banks. The banks agreed to rewrite their small business loan contracts in August 2017. ASIC set them out in Report 565, released 15 March 2018.
These findings are dated. They cover the big four only, under the 2016 rules. Back then, a small business had fewer than 20 staff, and most covered loans were up to $1 million. The banks agreed to extend the changes to facilities up to $3 million. The current coverage tests above are broader, but the old findings are not a statement that every lender now uses the same terms. The changes differed between banks and loan types.
| Clause | What ASIC said | What the banks changed |
|---|---|---|
| Material adverse change | Likely unfair where the event carries no material risk of a missed payment | Removed, or no longer applied |
| Financial covenants | A breach shouldn't be a default without material credit risk | Some banks removed or restricted covenants; treatment varied by bank and lending type, with exceptions including certain specialised facilities |
| Non-monetary defaults | A breach should create a material risk before the lender acts | Restricted default events and added remedy periods; precise treatment varied |
| Unilateral variation | You need notice and a chance to leave without penalty | Restricted variation powers and provided notice and exit rights; periods varied |
| Indemnities | You shouldn't cover the lender's own fraud, negligence or wilful misconduct | Narrowed, including for receivers the lender appoints |
| Entire agreement | It disclaims what bank staff told you | Removed by the one bank that had it |
Later cases also identified unfair terms in other banks' contracts. In May 2020, the Federal Court declared terms in 6 Bendigo and Adelaide Bank small business contracts unfair. In August 2021, it did the same for Bank of Queensland.
Bank or non-bank: check who is lending
Report 565 covered banks only. In 2018, online lender Prospa changed its small business loan terms for borrowers and guarantors after an ASIC review.
Today, ASIC says a lender that only makes commercial loans needs no credit licence and no AFCA membership. AFCA, the Australian Financial Complaints Authority, hears complaints without a court case. ASBFEO has urged borrowers to check that a lender is an AFCA member before borrowing.
ASIC's banking priorities letter of 30 September 2026 adds a new review of non-bank lending to small business. It is expected to start in the second quarter of the 2026–27 financial year.
Financial covenants: a default while you pay on time
A financial covenant is a promise to keep a financial ratio above or below a set level. Common ones measure interest cover, debt against earnings, or loan against property value.
Worked example 1: a covenant breach with every repayment made
These are illustrative figures. A company running 3 cafés borrows $600,000 at 9% a year. Assume an interest-only loan, an unchanged balance and rate, and no additional interest charges: annual interest is $54,000 ($600,000 × 9%).
The agreement requires interest cover of at least 2.0 times, tested each quarter on the last 12 months. Interest cover is earnings before interest and tax (EBIT) divided by interest.
| Last year | After a slow winter | |
|---|---|---|
| EBIT, last 12 months | $150,000 | $100,000 |
| Interest | $54,000 | $54,000 |
| Interest cover | 2.78 times | 1.85 times |
| Covenant of 2.0 times | Met | Breached |
To pass, the company needs EBIT of at least $108,000 ($54,000 × 2.0). That is 72% of last year's figure ($108,000 ÷ $150,000). A 28% fall takes EBIT to $108,000 and interest cover to exactly 2.0 times, which still meets the covenant. A fall of more than 28% breaches it, under these assumptions.
What happens next turns on one phrase. If a breach is an event of default, the lender may be able to demand the full balance. If the agreement makes it a review event only, the parties may have agreed to a review rather than enforcement on that ground. Check every linked default and enforcement provision: the label alone does not prevent enforcement. ASIC reported that one big four bank treats a covenant breach in cash flow lending as a review event.
| What the agreement says | What to ask for instead |
|---|---|
| A covenant breach is an event of default | A covenant breach is a review event only |
| Ratios tested monthly, on figures the lender calculates | Quarterly testing, on your accountant's figures, with the formula written down |
| No time to fix a breach | 60 days to remedy, or to agree a waiver |
Material adverse change clauses
A material adverse change (MAC) clause lets the lender call a default if something changes for the worse. It often doesn't say what that something is. The lender decides.
In that historical review, the big four told ASIC their MAC clauses had been removed or would no longer be applied to the covered small business loans. ASIC considers such a clause likely unfair where the change carries no material risk of a missed payment.
| What the agreement says | What to ask for instead |
|---|---|
| The lender may declare a default if, in its opinion, a material adverse change occurs | Delete the clause |
| A change in your "financial condition or prospects" | A named event, such as a court judgment above a set dollar amount |
Non-monetary defaults and cross-default
A non-monetary default is a breach that isn't a missed payment. Think of a late financial report, a lapsed insurance policy or a change of director.
ASIC expected banks to act on these only where the breach creates a material risk. That means a risk of a missed payment, or of losing the security. Most events came with a period to fix them, from 5 business days to 30 calendar days. Insolvency was the exception.
A cross-default clause makes a default under another contract a default under this one. ASIC said it must not let in events outside the agreed list.
In the Bank of Queensland case, the court declared unfair a term letting the bank alone decide when a default occurred. That included minor events, with no chance to fix them.
| What the agreement says | What to ask for instead |
|---|---|
| Any breach of any obligation is a default | Only breaches that create a material risk of non-payment, or to the security |
| Default occurs immediately | Written notice and at least 30 days to remedy |
| A default on any debt to anyone | A cross-default limited to this lender, above a dollar threshold |
One-sided variation
A variation clause lets the lender change the agreement after you sign.
ASIC uses this as an example on its unfair terms page. In the example, a lender can change any term in unspecified ways on 5 days' notice. ASIC says that may be unfair, as the borrower has no real chance to exit without penalty.
Report 565 says at least 30 calendar days' notice is generally needed. Larger drawn facilities may need 90 to 120 days. You also shouldn't pay a fee to leave because of the change.
| What the agreement says | What to ask for instead |
|---|---|
| We may change any term at any time, on notice | Changes limited to listed reasons, with at least 30 days' written notice |
| Break costs apply if you repay early | No fees or break costs if you leave because of the change |
Indemnities and certificates
An indemnity is a promise to cover the lender's losses and costs. A broad one has you paying for the lender's own mistakes.
In the historical review, the banks confirmed changes excluding specified losses caused by their own fraud, negligence or wilful misconduct, with protections also addressing appointed receivers. The precise wording differed. Prospa also narrowed its borrower indemnity after ASIC's review.
A conclusive evidence clause makes the lender's certificate of the amount owed stand unless you prove it wrong. The court declared Bank of Queensland's version unfair.
| What the agreement says | What to ask for instead |
|---|---|
| You indemnify us against all loss, however caused | Not loss caused by the lender's or a receiver's fraud, negligence or wilful misconduct |
| All enforcement costs, on a full indemnity basis | Reasonable costs, properly incurred |
| Our certificate of the amount owing is conclusive | A certificate is evidence of the amount, and you can dispute it |
Equipment finance has its own version. ASIC flags a shop-fittings lease where payments continue even when the goods are faulty.
Default fees and default interest
Default fees are where the rate you compared stops being the rate you pay. ASIC says fees that may or may not arise sit outside the upfront price. So the unfair terms test can reach them.
ASIC's example is a $5,000 fee for a missed repayment. It says the term is likely unfair if the fee exceeds what the lender needs to protect itself from loss.
Worked example 2: what a 10-day business loan default costs
These are illustrative figures. A company owes $400,000. A customer pays late, so a $9,000 repayment goes in 10 days late.
The agreement has a $5,000 default fee. It also charges default interest of 4% a year above the normal rate, on the whole balance, while in default.
| Charged on the whole balance | Charged on the overdue amount | |
|---|---|---|
| Default interest, 10 days | $438.36 ($400,000 × 4% × 10 ÷ 365) | $9.86 ($9,000 × 4% × 10 ÷ 365) |
| Default fee | $5,000.00 | The lender's actual cost |
| Additional default charges, above ordinary interest | $5,438.36 | $9.86, plus that cost |
On the first version, the additional default charges are about 60% of the repayment itself ($5,438.36 ÷ $9,000). Ordinary loan interest remains payable and is not included in this comparison. The alternative is a negotiation proposal, not a statutory cap on the lender's recoverable costs.
| What the agreement says | What to ask for instead |
|---|---|
| A fixed default fee | A fee no higher than the lender's actual cost |
| Default interest on the full balance | Default interest on the overdue amount only |
The director guarantee
A lender may ask a company's directors to guarantee the loan. A personal guarantee on a business loan is a promise to pay the company's debt yourself if it can't.
Moneysmart, ASIC's consumer site, is blunt about going guarantor on a loan. You may have to repay the whole loan plus interest. If your home secures the guarantee, it may be at risk if you cannot pay. A guarantee can expose your personal assets, but how a lender can recover depends on the security and applicable enforcement process. For business loans, it says to get independent accounting and legal advice before you sign.
A guarantee can be limited. Moneysmart suggests asking the lender for the exact amount, when it may reduce and when it can end. After ASIC's review, Prospa's guarantors stopped being liable for increases in the principal and interest agreed at the start.
| What the agreement says | What to ask for instead |
|---|---|
| All money the company owes you, now or in future | This loan only, up to a stated dollar limit |
| Continues after you resign as director | Released when you leave and a replacement is accepted |
| Covers any increase in the loan | The original principal and interest only |
Suppliers ask for them too. Our Insight covers whether to sign a director's guarantee for a supplier.
Three clause rewrites worth asking for
Lenders often say their documents aren't negotiable. Asking still costs nothing, and the answer tells you something about the lender.
The variation clause
What the lender sends:
The Lender may vary any term of this Agreement at any time by giving the Borrower notice.
What to ask for:
The Lender may change a term only to the extent required by a change in applicable law. It may change a pricing term to reflect a change in funding costs only where that term and an objective adjustment method are identified in the facility schedule, and only to the extent justified by that method. Unless the law requires an earlier change, the Lender must give at least 30 days' written notice explaining the reason, calculation and effective date. The Borrower may repay in full before the change takes effect without an early-repayment fee or break cost. Accrued interest and other amounts properly due remain payable.
The event of default clause
What the lender sends:
An Event of Default occurs if the Borrower breaches any obligation under this Agreement. It also occurs if, in the Lender's opinion, a material adverse change occurs.
What to ask for:
A payment Event of Default occurs only if an amount remains unpaid more than 5 business days after its due date. For an obligation other than payment, an Event of Default occurs only if a material breach creates a material risk of non-payment and remains unremedied 30 days after the Borrower receives written notice specifying the breach and the remedy required. The Lender must not accelerate repayment or enforce security solely because of that non-monetary breach during the remedy period.
This proposal addresses payment and remediable non-monetary breaches. Insolvency, fraud, urgent threats to security and any cross-default provisions need separate, consistent treatment. A lawyer should align the definitions, remedies and security documents.
The indemnity
What the lender sends:
The Borrower indemnifies the Lender against all losses, costs and expenses in connection with this Agreement, however arising.
What to ask for:
The Borrower indemnifies the Lender against reasonable costs properly incurred because of the Borrower's default. It does not cover loss caused by fraud, negligence or wilful misconduct. That applies to the Lender, its officers, employees and agents, and any receiver it appoints.
Business loan agreement checklist
These are the business loan terms and conditions to check before you sign. Each line is a question for the lender, in writing.
Coverage. Under 100 staff or $10 million turnover, standard form, and $5 million or less upfront?
Lender. Is the lender an AFCA member?
Covenants. Which ratios, how often tested, and is a breach a default or a review event?
Headroom. Have you run last year's worst quarter through each ratio?
MAC. Is there a material adverse change clause? Ask for it to go.
Defaults. Does each non-monetary default need material risk, notice and time to fix? Is cross-default limited to this lender?
Variation. How much notice, for which changes, and can you leave without a fee?
Indemnity. Does it exclude fraud, negligence and wilful misconduct by the lender and any receiver?
Default costs. Is default interest charged on the overdue amount or the whole balance?
Guarantee. Is it capped, limited to this loan, and released when you leave?
Promises. Is there an entire agreement clause? Keep the emails about anything staff told you.
Advice. Have an accountant and a lawyer read the agreement and the guarantee?
When to call a lawyer
Before you sign a guarantee over your home. Moneysmart says to get independent legal and accounting advice before signing a business loan. It matters most when the family home backs the guarantee.
A facility that may fall outside the coverage tests. Get advice where the upfront price exceeds the cap or the contract was substantially negotiated. Minor negotiation alone does not remove standard-form status. Other laws, remedies and applicable industry codes may still matter.
A default notice has arrived. Seek prompt advice about its deadline and any threatened enforcement. ASIC describes complaining to the lender and, where available, AFCA; eligibility and jurisdiction still matter. Court remedies may also be relevant. Do not assume that making a complaint automatically stops enforcement. ASBFEO can help with dispute support and referrals.
What this doesn't cover
Consumer and home loans, which carry their own credit rules. Detailed analysis of facilities outside the coverage tests or genuinely negotiated contracts. Industry codes a lender may subscribe to, which ASIC notes may add similar protections. Most of equipment finance, including chattel mortgages and hire purchase. Tax, stamp duty and security registration. And loans to buy a business, which bring their own contracts.
Original research dated 17 October 2026; corrections checked 18–19 October 2026. Sources include ASIC's unfair contract term guidance, Report 565 and the cases linked above, ASIC Act ss 12BF–12BI on legislation.gov.au, ASBFEO and Moneysmart. The position can change.
The interest rate is only one part of the borrowing decision. Use the checklist to identify clauses that could disrupt cash flow, restrict the business or expose a director personally. If you use Contractam to analyse the agreement, check that the document type is supported and take material legal or security questions to your adviser before signing.
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Contractam provides contract review and information, not legal advice. For advice specific to your situation, consult a qualified Australian lawyer. Contractam reviews contracts under Australian law only. See our disclaimer.