What do changes to the CCCFA mean for small businesses?

Small business owners looking to drive growth through financial borrowing might want to take notice of recent changes to the Credit Contracts and Consumer Finance Act (CCCFA). 

The legislation, originally passed in 2003, aims to encourage responsible lending practices for individuals and businesses. It has been amended and updated in the years since to refine the framework, most recently in August 2022.

What is the CCCFA – and how does it affect small business lending?

The CCCFA provides a prescribed framework in which both borrowers and lenders must operate. 

According to the Ministry of Business, Innovation and Employment (MBIE), the Act aims to ensure that borrowers make informed choices and keep track of their debts, and that lenders act responsibly at all times.

Among other things, lenders are required to: 

• Comply with disclosure obligations. 
• Ask detailed questions about the borrower’s circumstances. 
• Conduct an affordability and suitability assessment to ensure the borrower’s ability to make repayments.

One part of the law that specifically impacts small businesses relates to protection against oppressive behaviour by lenders. A lender cannot unfairly pressure a borrower to repay the loan sooner than agreed in the contract, as this could amount to illegal conduct. 

In 2021, MBIE was asked to review the lender and borrower requirements, leading to a round of changes being made in July 2022. In August, a second round of changes was announced, rolling back some of the restrictions and processes that had been put in place. 

Prospa understands the ins and outs of small business lending from years of experience – and that sometimes, cash is needed quickly and simply. Throughout the period of changes to the CCCFA, Prospa has maintained the fast turnaround on its loan application and funding times, and continues to optimise processes to ensure speed and flexibility.

What recent changes have been made? 

For small businesses, the CCCFA represents an attempt to minimise risk, prioritising responsible lending to help borrowers make good financial decisions. 

But it also risked slowing down processes as borrowers were subjected to an increased level of scrutiny – with little payoff for the missed opportunities and delayed growth plans. 

The most recent round of changes, which is expected to take effect in March 2023, makes the following adjustments to the CCCFA’s framework, winding back some of the more onerous restrictions on lending: 

• Narrowing the expenses considered by lenders. The expenses considered by lenders have been narrowed to exclude discretionary expenses. The rationale here is that lenders may otherwise overestimate the expenses of borrowers. 
• Providing more flexibility for lenders about how certain repayments may be calculated. The conservative assumptions lenders were required to make have been eased, including in relation to credit cards and buy-now pay-later schemes. 
• Expanding exceptions from a full income and expense assessment for refinancing of existing credit contracts. There is now the opportunity for debt refinancing or consolidation to make the debt more manageable and improve safe access to credit. 

Overall, these changes generally indicate increased flexibility and fewer restrictions for borrowers, which is good news for small businesses eyeing off growth opportunities through financing.

How can small businesses owners respond? 

Small business owners can respond to recent adjustments to the CCCFA by: 

• Trying a different tack for growth. Growth can occur in more ways than one. For example, businesses in the retail sector can boost sales by diversifying their payment options and eliminating abandoned carts. 
• Planning for cash rate changes. A comprehensive cash flow forecast can help give you a glimpse into the future of your business – and allow time to adjust in advance of peaks and troughs. 
• Trying a Prospa Line of Credit. Small business loans are just one option for financing. A Prospa Line of Credit can provide on-demand funds to assist with dips in cash flow.