Understanding the Risks: AFCA's Warning to SMEs on Unregulated Lenders

AFCA, which provides free and independent dispute resolution services for financial complaints, has observed a 36% rise in grievances related to incorrect fees, premiums, and charges. In the financial year 2025, AFCA closed over 2,000 small business complaints concerning finance, with 21% of them dismissed because they fell outside AFCA's jurisdiction. A significant portion of these dismissals was due to the financial firms not being AFCA members.

Suanne Russell, AFCA's lead ombudsman for small business, highlighted the growing concern: "If a small business lender is not a registered member of AFCA, the small business cannot lodge a complaint with us if things go wrong, leaving these business owners vulnerable." She further noted the mounting pressures on small businesses, including cash flow challenges, financing difficulties, and rising costs and interest rates.

To safeguard their interests, SMEs are advised to:

• Verify Lender Credentials: Ensure that any prospective lender is a registered member of AFCA. This membership provides a layer of protection, allowing businesses to seek recourse through AFCA's dispute resolution services if issues arise.
• Understand Loan Terms: Thoroughly review and comprehend all loan terms and conditions. Pay close attention to interest rates, fees, repayment schedules, and any potential penalties.
• Seek Professional Advice: Consult with financial advisors or legal professionals before entering into loan agreements. Their expertise can help identify potential pitfalls and ensure that the financing aligns with the business's needs and capabilities.

In conclusion, while alternative financing options can offer flexibility and accessibility, SMEs must exercise due diligence when selecting lenders. Ensuring that a lender is an AFCA member and fully understanding the terms of any financial agreement are crucial steps in mitigating risks and protecting the business's financial health.