Small Business Lending under the Banking Code of Practice
INTRODUCTION
The Banking Code of Practice (BCP) is a voluntary code of conduct that sets standards for how banks treat their customers. The BCP was last updated in May 2025, replacing the October 2021 version. It is developed by the Australian Banking Association and covers the major banks and some other banking institutions. Not all banks are subject to the BCP. Many smaller banks are mutually owned and they have their own code, the Customer Owned Banking Code of Practice.
The BCP has significant protections for small businesses that apply for or obtain a bank loan. Even if a lender is not subject to the BCP, the standards set by the BCP are looked on as industry best practice, and so some non-bank lenders have also adopted the BCP protections for their small business customers.
In this article we will look at the main provisions of the BCP relating to small business lending in the current version of the BCP. These are:
The definition of a small business.
Loan applications.
Monetary defaults.
Non-monetary defaults.
Loan extensions.
External valuations and investigators.
WHAT IS A SMALL BUSINESS UNDER THE BCP?
For a business customer to qualify as a “Small Business” it must meet 3 conditions when it obtains the loan. If the business is part of a “Business Group”, the 3-part test is applied to the whole Business Group. (A Business Group of a customer covers the customer, each entity the customer controls, each entity which controls the customer (a Controller), and each other entity which is controlled by a Controller.)
The 3 conditions are:
Annual turnover: had an annual turnover of less than $10 million in the previous financial year.
Employee count: has fewer than 100 full-time equivalent employees.
Total debt: has less than $5 million total debt to all credit providers. This does not include debt regulated by the National Credit Code or debt owed between members of a Business Group. It does include undrawn amounts under existing loans, and any loan being applied for.
Businesses excluded from being a Small Business
A business is excluded from being a Small Business under the BCP, even if it meets the 3 conditions above, if it is:
a listed entity;
a partnership or joint venture with more than 20 partners or venturers;
a government entity;
an entity regulated by the Australian Prudential Regulation Authority (APRA);
an Australian Financial Services Licensee authorised under its licence to operate registered managed investment schemes as a responsible entity, to provide custodial and depository services, or to operate a corporate collective investment vehicle;
a corporate collective investment vehicle; or
a member of a Business Group that includes any of the above.
Small business definition in ASIC Act
The Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act) has provisions which make unfair contract terms (UCTs) in a “small business contract” unlawful.
The definition of a small business contract in the ASIC Act covers broader category of businesses than the definition of Small Business in the BCP.
The ASIC Act defines a small business contract as one where one party to the contract is a business that either employs less than 100 persons or has a turnover in the last income year of less than $10 million, and where the upfront price payable under the contract does not exceed $5 million. Interest payable under a credit contract is to be disregarded in working out the upfront price in relation to this cap. Therefore, a small business contract under the ASIC Act could include a single loan of up to $5 million, while the BCP has a cap for all loans of $5 million.
This difference between the ASIC Act and the BCP means that care is needed when drafting agreements to comply with both the UCT and the BCP requirements. If a bank has some provisions in its loan agreement which only apply to a BCP Small Business, they might not apply to some small businesses which are covered by the UCT regime but not covered by the BCP. This raises the risk that those businesses are subject to unfair terms.
APPLYING FOR A LOAN
Information to loan applicant: When a Small Business customer is applying for a loan, a bank must clearly inform the customer about the information needed for the application and expected timeframes for decisions after receiving all requested information.
Assessing loan applications: Banks must exercise the care and skill of a “diligent and prudent banker” when considering new loans or limit increases for a Small Business. This standard is not the same as the responsible lending obligations which apply to banks when lending for consumer finance under the National Credit Code. When making the assessment, a bank must consider the borrower’s financial position and account conduct. In each case this is limited to “appropriate circumstances reasonably known” to the bank, so it would not include information that the bank could not reasonably be expected to know. The bank may also consider projected future cash flows where this is relevant.
Third party certificates: Banks must not ask third parties like an accountant to certify a borrower’s ability to repay. However, they can consider financial resources of connected third parties such as related entities, directors, shareholders, trustees, or guarantors.
Documentation requirements: Banks must provide a plain English document clearly outlining the key terms and conditions, separate from other required documentation, before the Small Business customer accepts a loan offer.
Declined applications: If a bank declines a loan application it must tell the Small Business applicant the general reason why, unless there are reasonable grounds not to do so.
MONETARY DEFAULTS
Notice period: If a Small Business borrower misses a loan payment, its bank must give at least 30 days' notice before demanding full repayment or taking enforcement proceedings, subject to some exceptions explained below. During this notice period, if the borrower pays the overdue amount (including any subsequent payment failures that occur during the notice period), the bank cannot proceed with requiring full repayment or enforcement action based on that payment default.
Exceptions to notice requirements: Banks may provide shorter notice or no notice if the borrower or a guarantor becomes insolvent, enters bankruptcy, voluntary administration, or loses legal capacity, or if the bank reasonably needs to manage a material and immediate risk related to the default, the borrower’s circumstances, or the security value.
Overdrafts and on-demand facilities: These facilities may not require notice for repayment, but if failure to repay constitutes a default under another loan, the bank must comply with the BCP requirements when enforcing that other loan.
NON-MONETARY DEFAULTS
Limited to specific events: The BCP significantly restricts when banks can take action for non-monetary defaults. Banks cannot include general “material adverse change” clauses in standard form Small Business loan contracts. Banks can only enforce loans for specific events, including when:
the borrower or a guarantor is insolvent, goes into bankruptcy, voluntary administration, other insolvency process or arrangement, or no longer has legal capacity;
another creditor brings enforcement proceedings against the borrower or a guarantor, or against the borrower or their assets;
early repayment is required under a separate financing arrangement that the borrower or a guarantor has with the bank;
default based action (which means exercising a legal or contractual right as a direct result of an event of default) is taken by the bank under a separate financing arrangement against the borrower or a guarantor, due to an event of default;
the bank believes on reasonable grounds that the borrower or a guarantor has not complied with the law or any requirement of a statutory authority;
it becomes unlawful for the borrower or the bank to continue with the loan;
the borrower or a guarantor gives the bank information or makes a representation or warranty to the bank which is materially incorrect or misleading (including by omission);
the borrower uses the loan for a purpose not approved by the bank;
the borrower’s assets or a guarantor’s assets are dealt with, or attempted to be dealt with, in breach of the loan or any security or other agreement with the bank, without the bank’s consent;
the borrower or a guarantor does not provide financial information required by the borrower’s loan agreement;
the borrower or a guarantor does not maintain a licence or permit necessary to conduct the borrower’s business;
the borrower or a guarantor does not maintain insurance required by the borrower’s loan agreement;
legal or beneficial ownership, or management control of a borrower or guarantor or their business, changes without the bank’s consent; or
the status, capacity or composition of the borrower or a guarantor changes without the bank’s consent.
Material impact requirement: Even when one of the above non-monetary default events occurs, a bank can only act if the event is material by nature or has a material impact on:
the borrower’s ability to meet financial obligations (or the bank's ability to assess this);
the bank's security risk (or its ability to assess this); or
the bank's legal or reputation risk (for some non-monetary defaults only).
Property development and specialised loans: Despite these limits on non-monetary defaults, financial indicator covenants (for example, leverage ratios) or special conditions may still apply to property development loans and specialised lending transactions (margin lending, SMSF loans, construction finance, foreign currency loans, etc.)
Required process before taking action: Before taking default-based action for a non-monetary default, a bank must provide notice specifying the grounds of default and allow at least 30 days for the default to be remedied (where it is able to be remedied). Shortened notice periods apply in cases of insolvency or to manage material and immediate risks.
LOAN EXTENSIONS
Notice period: If the loan is not structured to be fully repaid through regular payments by the end of its term, a bank must give the borrower at least 3 months' notice if it decides not to extend the loan (assuming the borrower is not in default).
Changes to terms: If a bank agrees to extend or refinance a loan, it does not have to offer the same terms as the existing agreement.
EXTERNAL VALUATIONS AND INVESTIGATORS
Property valuations: Under the BCP, banks commit to fair and transparent processes for using external expert valuations with Small Business customers. Banks must communicate clearly about the purpose of valuations and explain their purpose. They must provide the customer with a copy of the valuation that the customer has paid for, and the related valuer instruction, if the valuation relates to commercial or agricultural real property (unless enforcement action has commenced). Banks may require the borrower to acknowledge limitations on use of the valuation before providing it. Valuers used must be qualified and experienced and belong to professional organisations who follow a similar code of practice.
Investigating accountants and insolvency practitioners: When appointing investigating accountants and insolvency practitioners, the BCP requires banks to act fairly and to ethically manage potential conflicts of interest, such as when a receiver is appointed who has been an investigating account for a Small Business. A bank may only appoint qualified practitioners who belong to relevant professional organisations with appropriate codes of conduct, and must require additional internal oversight when appointing investigating accountants as receivers. Banks must also consider using an alternative qualified practitioner if the relationship between the Small Business customer and the investigating accountant has deteriorated.
CONCLUSION
Banks that subscribe to the BCP should have procedures in place to comply with the BCP protections for Small Business borrowers. They also need to ensure that their loan terms and conditions reflect the BCP provisions on monetary and non-monetary defaults, and have a plain English outline document to explain the key loan provisions.
Borrowers who have not been treated by their bank as required by the BCP may have grounds for an AFCA complaint or legal action against their bank.
If you need assistance on understanding how the BCP applies to you, please get in touch.