5.4 Loan renewal and enforcement

Matters relating to extending the term of a loan or continuing the terms on which a loan was first made have been a potent source of disagreement between small business borrowers and banks, and a frequent cause of dissatisfaction. This is understandable. If the bank will not extend the term of a loan beyond the term originally agreed or if the bank will do that only on terms the borrower considers unfair, the borrower will often feel let down by ‘his’ or ‘her’ bank. If the borrower cannot refinance elsewhere, the loan agreement will probably be enforced and the borrower’s business will fail.

Clause 86 of the 2019 Banking Code will provide, in general terms, that lenders must give three months’ notice of their intention not to renew a loan to a small business borrower who is not in default. I consider that this requirement is appropriate, and that it will go some way to ameliorating the hardship demonstrated in some of the case studies that related to loan renewal and enforcement.

But I do not favour any reform beyond this. In particular, I do not favour imposing any obligation on a lender to renew a loan or to renew it on particular terms. There is, in my view, no sound basis for seeking to interfere in what must be the free choice of both parties to decide whether to make an agreement and, if so, on what lawful terms that agreement will be made. The risk that a term loan will not be extended, and the risk that new and different terms may be sought by the lender as the price for making a new loan agreement, must both rest with the borrower. These are risks that are inherent in any and every business venture that borrows.