What is a small business?

Although the protections for small business credit are increasing, the definitions of what is a small business are inconsistent across financial services legislation and rules particularly in relation to the thresholds for employee headcount and lending amounts that determine whether a business is a small business for the relevant purpose.

Different lenders may apply wider definitions.

The National Credit Act does not apply to small business credit.

Here is a summary.

AFCA Rules
For small business loans (for small businesses with up to 100 employees), AFCA can consider a credit facility up to $5 million with a compensation limit of $1 million. For a business that is part of a group of related companies, AFCA cannot deal with a complaint lodged by a business if the business is part of a group that has 100 employees or more.

Australian Securities and Investments Commission Act 2001, section 12BC(2) (consumer protection)
That the business employs less than 20 employees or, if the business is a manufacturing business, the business employs less than 100 employees

Australian Securities and Investments Commission Act 2001, section 12BF(4) (unfair contracts for financial services)
That the business employs less than 20 employees, and the upfront price payable under the contract does not exceed $300,000, or if the contract has a duration of more than 12 months, the upfront price payable under the contract does not exceed $1,000,000

Competition and Consumer Act, Schedule 2, section 23(4)(unfair contracts for goods and services)
That the business employs less than 20 employees and the upfront price payable under the contract does not exceed $300,000, or if the contract has a duration of more than 12 months, the upfront price payable under the contract does not exceed $1,000,000

Corporations Act 2001, section 761G(12) (small businesses as retail clients)
That the business employs less than 20 employees, or, if the business is a manufacturing business, the business employs less than 100 employees

Australian Small Business and Family Enterprise Ombudsman Act 2015, section 5
That the business employs less than 100 employees or the business has less than $5 million in revenue in a year

Fair Work Act 2009, section 23 (unfair dismissal)
That a small business employer employs less than 15 employees

Income Tax Assessment Act 1997, section 328-110
That a small business entity has an annual turnover of less than $10 million

Banking Code of Practice
A business is a “small business” if at the time it obtains the banking service all of the following apply:
a) it had an annual turnover of less than $10 million in the previous financial year; and
b) it has fewer than 100 full-time equivalent employees; and
c) it has less than $3 million total debt to all credit providers including:
i. any undrawn amounts under existing loans;
ii. any loan being applied for; and
iii. the debt of all its related entities that are businesses.

The Financial Services Royal Commission Final Report recommended that the definition of ‘small business’ in the Banking Code be amended to any business or group employing fewer than 100 full-time equivalent employees, where the loan applied for is less than $5 million.

Code of Lending Practice for AFIA Online Small Business Lenders
Online Small Business Loan means a loan where:
    (a) the finance is provided (or to be provided) for a purpose that is wholly or predominantly a business or commercial purpose and where the National Credit Code is not applicable to the finance provided (or to be provided); and
(b) the finance provided (or to be provided) is Unsecured or is secured by a guarantee.
    For the avoidance of doubt, the following types of finance, or any arrangement of a similar nature, are not an Online Small Business Loan for the purposes of the Code:
a) equipment finance in which the lender has an interest of any kind in the financed goods or equipment;
b) a rental agreement or instalment purchase agreement;
c) an operating lease;
d) a finance lease;
e) invoice financing of any kind; and
f) a factoring arrangement or finance facility.
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