Banking royal commission: Franchising, pre-filled loans in the spotlight, as concerns mount over fallout for SMEs

The banking royal commission will today enter its third day of public hearings focused on SMEs, after a second day of testimonies that revealed how devastating the consequences can be when failed franchises are dependent on bank loans.

One of the key witnesses to give evidence at the Melbourne hearings yesterday was Marion Messih, a former part-owner of a Pie Face franchise, who was forced to pay the full amount of a business loan to Westpac, despite her business partners owing half of the amount.

As Messih told the commission, she first began exploring the idea of buying a franchise with her brother and sister-in-law because she was looking for “a change of direction, hopefully run a business, earn some money, retire early”.

They purchased the Pie Face outlet in Melbourne in 2013 and were told by the franchisor to take out a $360,000 business loan with Westpac, as the franchisor had accreditation with the bank.

But she said it was clear after they started operating the franchise that the former owner had “exaggerated” the outlet’s financial position. The business struggled to make even $500 a week, and Messih was working 14-hour days to keep it going.

The following year, Messih and her business partners walked away from the business and she sought hardship assistance from the bank, which would allow her loan repayments to be suspended while she looked for other work.

This was before Pie Face collapsed into voluntary administration, and it was revealed the franchise network had not been profitable for a decade.

To relieve mounting financial pressure, Messih told the commission she was forced to sell an investment property for $750,000, but she had hoped the sale would allow her to pay off her mortgages, as well as part of the business loan debt.

She said the bank had agreed to that arrangement, but the commission heard the day before settlement was due on the sale, Westpac called in the entire amount of the loan from Messih, despite her brother and sister-in-law owing half the amount. The property had been used as security for her portion of the loan.

Her sister-in-law is now paying her back in weekly installments, but the effects on Messih’s life have been devastating.

“It clearly shattered me because that was not all my debt,” she said.

“I worked hard to get where I was. I should be retired by now but I still owe money. It was overwhelming and stressful … my kids paid my bills and my loans for me; that’s not what a mother does.”

Earlier in the day, the commission also heard evidence from Westpac’s general manager of commercial banking, Alastair Welsh, who was forced to defend the bank’s practice of pre-filling forms for loan applicants or guarantors, according to Fairfax.

The questions followed evidence given on Monday by a pensioner who lost her home after providing a guarantee for her daughter and partner to buy a pool maintenance franchise.

In that case, a banker from Westpac had filled out some of the pensioner’s guarantee, including a section relating to legal advice, even though the pensioner had not yet received advice or signed the paperwork.

Welsh told the commission “it’s not uncommon for these to be filled out in anticipation of something happening”, and it often happens as a banker is walking a client through the required documents.

Australian Small Business and Family Enterprise Ombudsman Kate Carnell told Fairfax she has heard of this happening at a number of banks. It’s problematic in situations where small business owners trust their banks or feel they have no choice, she said. 

“I think it’s really unacceptable,” she said. “I also think small businesses have to be wary. Nobody was a winner in the end, except of course the person who got the bonus.”

Concerns about the future of SME loans

The royal commission will continue to hear about cases involving small businesses for the next week-and-a-half, but already some members of the small business community are concerned about what the fallout will be.

David Gandolfo is the president of the Commercial and Asset Finance Brokers Association of Australia (CAFBA) and a director of Quantum Business Finance.

He has worked in the sector for 30 years and his view is that the stories emerging from the royal commission, as upsetting as they are, don’t characterise the experiences of most small business operators.

“The vast majority get good outcomes,” he tells SmartCompany.

He hopes the royal commission finds that applying new “prescriptive guidelines” to limit SME lending won’t work, but he is worried that is exactly what will happen.

“Industry groups are not asking for it, small businesses are not asking for it, it’s consumer advocates,” he says.

“If a business is borrowing to acquire machinery, or stock, or commercial property, to take the business to the next level and increase output, they’re not looking for restrictions or regulation.”

“I promise you, if that recommendation is made and adopted it will hinder small businesses.”

Placing further restrictions on SME lending would only increase costs to borrowers and, ultimately, reduce the number of businesses who can get bank finance. This in turn may lead business owners to resort to other methods to try to fund their businesses.

“It’s an absolute concern,” says Gandolfo.

“In my 30 years of practice, I’ve never had a business want more processes to go through, more forms to fill out.”

Instead, he believes the answer lies in ensuring the correct remedies are in place for when things do go wrong, and in educating all stakeholders about their responsibilities. This includes bankers, brokers and small business owners.

“Education is where the solution is to whatever comes out in the lending space,” he says.

“We want good outcomes, we only want business to prosper.”

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