If you’re struggling to repay a business loan — it’s not always your fault

There’s a story we hear a lot about these days. It usually comes from small business owners, who are struggling to pay back a loan. These are good businesses, run by competent people, who just can’t understand why they have ended up in a painful financial crunch.

And sometimes, the answer is simple — they’ve been mis-sold a loan.

A simple loan mis-selling definition

So what does it mean? Well, mis-selling is when you’ve been given unsuitable advice, the risks were not explained to you or you haven’t been given the right information — and ended up with a financial product that isn’t right for your needs and ability to repay.

Financial services must be sold to you in a manner that is “fair, clear and not misleading”.

Source: Financial Conduct Authority (FCA)

What types of loan are often mis-sold?

The Professional Financial Claims Association  say that around 60,000 Fixed Rate business Loans (FRBLs) have been sold — yet many customers were not told about associated risks with the product, exit costs or over-hedging.

These are sometimes called ‘Tailored business loans’ — what this means is that the loan can limit the rate of interest being paid, as an alternative to having a variable rate of interest. It’s seen by some as a way to protect — or in the jargon, ‘hedge’ — their business against the next interest rate hike.

To make this profitable for them, lenders enter into their own special deal so they will still make money if interest rates rise. The problems usually arise when borrowers try to exit the deal — there’s often a crippling fee to pay that could stop you refinancing or selling your business. You literally can’t afford to leave.

How do you know you’ve been mis-sold a loan?

One of the giveaways is, of course, that telltale fee for ending the deal. Look for the ‘breakage’ cost for your deal — if it’s over 1% of the balance outstanding on the loan, then you could have been mis-sold and it’s a good idea to seek professional advice.

What to do if you’ve been mis-sold a loan

The first and most important piece of information: act quickly. Gather all the information you have on the loan, and the correspondence you have. It’s going to help you to have all the facts in order, and relevant dates mapped out. Next, make an official complaint to the lender. They’ll have an official complaints process with contact details. Don’t forget to log what you’ve done, who you’ve contacted and what was said. Finally, you can ask an external agency to help you. You may need a regulated financial adviser, the Financial Ombudsman Service, or contact the FCA to suggest your next steps.

Helpful links:

Money Advice Service https://www.moneyadviceservice.org.uk

Professional Financial Claims Association https://www.pfca.org.uk

Financial Conduct Authority https://www.fca.org.uk

Financial Ombudsman https://www.financial-ombudsman.org.uk