Warning to business owners, relatives of potentially severe fallout from loans

Flooding to a business area in the Auckland suburb of Wairau last month.
Photo: RNZ / Nick Monro

Flood-hit small business owners rebuilding after severe weather events are being warned to take a pause before seeking loans.

The dispute resolution service, Financial Services Complaints, said the number of complaints it has received has risen over the past six months as the financial pressure increased.

Financial Ombudsman Susan Taylor said small businesses rebuilding after the severe weather amid high inflation might be tempted to borrow.

However using family or relations’ assets as guarantees for debt could be disastrous, she warned, as responsible lending rules did not apply to business loans.

“Unfortunately, we see the cases at the other end, where people are facing the loss of their home because they gave the guarantee and didn’t fully understand the implications of doing so.”

She said the service had seen several recent cases in which the guarantor was forced to sell their home to pay off debt, including a couple in their eighties who lost their family home after their daughter’s home was sold to pay off an outstanding business loan which had not been paid back in full.

The couple said the event caused a huge amount of emotional stress, especially as they discovered their home had been marketed for sale without their knowledge.

In another recent case, a man lost his home and a lender started action to sell his stepmother’s home to settle the outstanding debt, as she had been listed as a guarantor for a business loan.

Taylor advised people asked to act as a guarantor for a business loan to seek independent legal advice before deciding.

“Family members should make sure that they understand the consequences if, unfortunately, the borrower defaults on the loan further down the track,” Taylor said.

“There can be a lot of pressure put on parents or other relatives to help out a child who perhaps is struggling with the business and needing money, and obviously there will be the desire to help your family member.”

Business owners should get independent advice and double-check if there was government support they were eligible for before taking out a business loan, Taylor said.

“This might mean making some tough decisions, especially around the viability of a business plan, but it is better to have these conversations sooner rather than later,” she said.

“As you run out of time, your options become fewer, debt is often significantly higher and the risk of losing assets, much greater.”

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