Is that clause in my business loan unfair? What the law covers and what you can do about it

Most business loan contracts are written by the lender and handed over to sign as they are. That’s normal. What isn’t acceptable under Australian law is a term in that kind of contract that tilts things so far the lender’s way that it goes beyond protecting their money.

If a clause in your loan — or an offer you’re about to sign — doesn’t sit right, this guide answers the questions in order: is your loan covered, what makes a term unfair, which clauses tend to cross the line, and what you can actually do.

Does the unfair contract terms law cover my business loan?

It does if four things are true. ASIC’s guidance on small business protections sets them out:

Test	What it means for a loan
Small business	Your business “employs fewer than 100 people” when the contract is signed, or had turnover under $10 million in the last income year
Standard form	The lender prepared the contract and you had little or no real chance to negotiate it
Upfront price	The upfront price is $5 million or less — principal plus fees disclosed at signing; interest is disregarded
Date	Entered into, renewed or varied on or after 12 November 2016

Two points catch people out. First, only one test of size needs to pass — a business with 120 staff but turnover under $10 million still qualifies. Second, contingent charges such as late fees and default fees aren’t counted in the upfront price, but they can still be challenged as unfair.

Most loans in the $5,000 to $5,000,000 range that owners actually take — unsecured working capital, lines of credit, equipment loans, and first mortgages, second mortgages or caveat loans over property — are written on standard forms. So for the typical small business borrower, the protections usually apply.

What actually makes a loan term unfair?

A term is unfair only if it fails all three of these tests at once:

1. Significant imbalance. It tips the parties’ rights and obligations heavily towards the lender.
2. Not reasonably necessary. It goes further than the lender needs to protect its legitimate interests — getting repaid, keeping its security intact.
3. Detriment. It would cause you harm if relied on, financial or otherwise.

A court also looks at how transparent the term is (plain language, clearly presented, easy to find) and at the contract as a whole. A tough term balanced by a protection elsewhere may survive. A tough term buried in fine print with nothing balancing it is much more exposed.

What the law doesn’t touch is the core deal. The amount you’re borrowing, the price you agreed to pay for it and the terms that define the main subject of the contract can’t be attacked as unfair just because you now think they were expensive. The law targets the clauses around the deal, not the deal itself.

Which loan clauses have regulators flagged?

When ASIC and the small business ombudsman reviewed small business loan contracts, they pushed lenders to remove or narrow a recognisable set of clauses. ASIC’s report on the big four banks’ changes and its later court actions against lenders keep returning to the same types:

• Broad default triggers. Clauses that let the lender call a default for something unrelated to repayments, or for an event the lender alone decides is “material”, with no chance to fix it first.
• One-sided variation rights. A right to change the terms “in any way” on short notice, without giving you a fair way to exit. ASIC’s own example is a change on “five days’ notice in writing”.
• Entire agreement clauses. Wording that stops you relying on what a lender’s staff told you before signing — for example, about how the lender would use its discretions.
• Oversized default fees. A fee that costs far more than the loss a missed payment actually causes the lender. ASIC’s guidance gives the example of a $5,000 default fee that “exceeds the amount required to protect the lender from loss”.
• Sweeping indemnities. Making you cover the lender’s losses even where they were caused by the lender’s own mistake or misconduct.
• Broad cross-default clauses. Treating a slip on an unrelated contract as a default on this loan, with no materiality threshold.

None of these is automatically unfair. Each depends on the exact wording and what else the contract says. But if your contract contains one in its broadest form, it’s worth asking about.

Not sure whether the loan you’re holding — or the offer on your desk — is the right fit at all? Tell us about it in a 60-second enquiry. There’s no credit check when you first enquire.

What can I do before I sign?

This is the cheapest moment to deal with a bad clause. Before signing:

1. Read the default and variation sections first. They matter most once something goes wrong, and they’re the ones most likely to be one-sided.
2. Ask specific questions in writing. “What events count as a default?” “Will I get time to fix a breach before you act?” “What fees apply if a payment is late, and how were they set?”
3. Ask for changes. On larger and property-secured loans especially, lenders do agree to narrow wording, add a remedy period or cap a fee.
4. Get the answers into the documents. If a lender explains a clause one way, ask for that explanation in writing. A verbal reassurance is exactly what an entire agreement clause tries to shut out.
5. Take independent advice when it’s warranted. Property security, personal guarantees and anything over a sum you’d struggle to replace all justify a lawyer’s read. Guarantors are usually required to get independent legal advice anyway.

Our list of questions to ask a business lender before you sign covers the wider conversation, and our explainer on what a business loan really costs shows how to put fees into total-dollar terms.

I’ve already signed. How do I challenge a clause?

ASIC describes a three-step route. Work through it in order:

1. Complain to the lender. Use its internal dispute process. Name the clause, explain why you think it’s unfair under the three tests, and say what outcome you want — removal, a narrower reading, a fee refund.
2. Go to AFCA if the lender is a member. The Australian Financial Complaints Authority is free for the business. If you accept an AFCA decision, it’s generally binding on the lender. Be aware that lenders who only make commercial loans aren’t legally required to join AFCA, as ASIC notes on its commercial loan disputes page.
3. Apply to a court. You can seek a declaration that the term is unfair. If granted, the term is void.

Along the way, the Australian Small Business and Family Enterprise Ombudsman can help small businesses understand their options. You can also report a lender to ASIC. ASIC generally doesn’t run individual disputes, but reports help it see patterns across an industry.

Should I keep paying while I dispute a clause?

Yes, in almost every case. A finding of unfairness voids the specific term, not the loan. If you stop paying while you argue about a fee or a variation clause, you hand the lender a genuine default under terms nobody disputes. That damages your position in the complaint and can add a default to your credit file.

The stronger approach is to keep the loan in good order, put your complaint in writing, and keep copies of every notice and reply. If the clause is causing real hardship right now — a sudden repricing or a demand you can’t meet — tell the lender that directly and ask what options exist while the complaint is considered.

What if the clause still makes this loan wrong for my business?

Sometimes the honest answer is that the loan doesn’t fit, whatever happens to one clause. A facility the lender can vary at will, or one with hair-trigger default terms, is a poor match for a business with lumpy income or a tight margin for error.

In that case the question becomes how to move. Check the early repayment and discharge terms first — our guide to repaying a business loan early explains what those costs usually look like. Then weigh the replacement options: our page on refinancing business debt covers when that makes sense, and what you can use as security explains how a different structure might change the terms on offer.

What does this look like in practice? (Illustrative example)

Illustrative only. The business and details are invented.

A Perth commercial cleaning company with 14 staff has an unsecured line of credit from an online lender. After a client pays two weeks late, the account drifts briefly over its limit. The lender issues a default notice, charges a flat default fee, and cites a clause allowing it to call the whole facility due for “any event which, in the lender’s opinion, may affect your ability to pay”.

The director works through the questions:

1. Covered? Fewer than 100 staff, a standard form contract signed in 2024, a limit well under $5 million. Yes.
2. Which clauses? The opinion-based default trigger and the flat fee.
3. What now? The account is brought back under its limit straight away, so there’s no ongoing breach. The director writes to the lender’s complaints team, quotes both clauses, explains why they go beyond protecting the lender, and asks for the fee to be reversed and the notice withdrawn.
4. Next step if needed. The lender is an AFCA member, so the director notes the timeframe for an AFCA complaint if the internal reply doesn’t resolve it.

Meanwhile the director starts planning a replacement facility with clearer default wording and a remedy period, so the business isn’t one late client away from the same problem.

Where do I go from here if I want a fairer loan?

A loan contract should protect the lender’s money without putting your business at the lender’s discretion. If you’re about to sign something that doesn’t feel that way, or you’re holding a facility you’d rather replace, it helps to talk to someone who reads loan documents for a living and can match you with an option that suits how your business actually runs.

That’s where we come in. Enquiring takes about 60 seconds, and there’s no credit check when you first enquire, so asking costs your file nothing. We don’t send your details to a pile of lenders — no auction, no flood of calls. A real person reads your enquiry, looks at your individual situation, including the clause or loan that’s worrying you, and calls you to talk it through. Please fill in the form accurately, so we can match the right option first time.

If you’d like a quick sense of your likely route first, try the loan navigator or browse the short-answer library.

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