Unfair Contract Terms in Small-Business Loan Agreements: A Template Audit for Private Lenders

Published 2 October 2026

Introduction

The unfair contract terms law protects small businesses from unfair terms in standard form loan contracts for financial products and services. Since 9 November 2023, proposing, applying, or relying on an unfair term in these contracts attracts civil penalties under the Australian Securities and Investments Commission Act 2001 (Cth) (‘ASIC Act‘).

Private lenders and non-bank financiers must audit their loan documents against this regime, with support from private lender and non-bank finance lawyers where needed. This article explains the legal triggers, the unfairness test, and the clauses most likely to be challenged, so you can align your templates with current requirements.

Interactive Tool: Check Your Loan Agreement for Unfair Contract Terms

Triggering the Unfair Contract Terms Law for Private Lenders & Non-Bank Financiers

Applying the Regime Specifically to Small Business Loan Agreements

The unfair contract terms law applies to a term in a small business loan contract where at least one party is a small business, the contract is a standard form contract, and the loan contract is a financial product or provides, or may provide, financial services. The Australian Securities and Investments Commission (ASIC) administers this regime under the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act). Under Section 12BF(1) of the ASIC Act, an unfair term in such a contract is void.

A business loan supplied by a private lender or non-bank financier may fall within this regime because the Competition and Consumer Act 2010 (Cth) includes contracts for lending money within the meaning of ‘services’.

Meeting the Standard Form Contract & Small Business Thresholds

Under Section 12BF(4) of the ASIC Act, a contract is a small business contract where the upfront price payable does not exceed $5 million and at least one party:

• employs fewer than 100 persons; or
• had annual turnover below $10 million in the last income year ending before the contract was made.

Interest payable under a loan contract is disregarded when calculating the upfront price under Section 12BF(5) of the ASIC Act. Under Section 12BK of the ASIC Act, a court considers:

• bargaining power;
• who prepared the contract;
• the borrower’s opportunity to negotiate; and
• whether the terms reflect the borrower or transaction.

Minor changes or selecting from lender-set options may not prevent a contract from being standard form.

Understanding the Core Unfairness Test for Loan Contracts & Security Documentation

Assessing Significant Imbalance & Legitimate Interests

Under Section 12BG(1) of the ASIC Act, a term in a covered loan contract or security document is unfair only if it satisfies three conditions. The term must:

• create a significant imbalance in the parties’ rights and obligations;
• not be reasonably necessary to protect the legitimate interests of the party advantaged by it; and
• cause detriment if applied or relied on.

Section 12BG(4) of the ASIC Act presumes that the term is not reasonably necessary to protect those legitimate interests unless the advantaged party proves otherwise. A lender may therefore need to show why a particular power or protection is needed, rather than relying only on the wording of the loan contract.

The Role of Detriment & Contract Transparency

Under Section 12BG(1)(c) of the ASIC Act, an unfair contract term must cause financial or other detriment if it is applied or relied on. Detriment may arise from:

• the borrower’s financial loss; or
• another adverse consequence, such as delay or the loss of a contractual opportunity.

Under Section 12BG(2) of the ASIC Act, a court must consider the extent to which the term is transparent and the loan contract as a whole. Section 12BG(3) of the ASIC Act states that a transparent term is expressed in reasonably plain language, legible, clearly presented, and readily available to each affected party.

Terms Most Likely to be Challenged in Commercial Lending Agreements

Unilateral Variation Clauses & Broad Indemnities

A unilateral variation clause may create an unfair contract term where it gives the lender broad discretion to change loan documents without the small business borrower’s agreement. Under Section 12BH(d) and (g) of the ASIC Act, terms allowing one party to vary the contract or financial services unilaterally may be unfair.

The risk is higher where the clause:

• permits changes to any term;
• does not identify the circumstances for variation; or
• gives the borrower no reasonable opportunity to exit without penalty.

Broad indemnities may also be challenged where a borrower must reimburse the lender for losses, costs or liabilities arising from the lender’s fraud, negligence or wilful misconduct. ASIC identified this concern in ASIC Report 565, including indemnities covering the lender’s employees, agents, contractors or receivers.

Such wording may shift responsibility for conduct outside the borrower’s control and create a significant imbalance in the loan contract.

Disproportionate Default Fees & Material Adverse Change Events

Default provisions can attract scrutiny when the consequences are disproportionate to the borrower’s breach or the lender’s actual credit risk. Report 565 identifies late payment fees and other default consequences as terms requiring review.

A minor breach should not automatically allow immediate enforcement, acceleration of the loan, or other severe action where it creates no material risk to the lender.

A material adverse change event of default presents a separate concern when it allows a lender to call a default because of an unspecified negative change in the small business borrower’s circumstances. Report 565 recorded that these clauses gave lenders extremely broad discretion, even where the borrower continued making payments on time.

Prospa’s 2018 amendments, discussed below, addressed similar default concerns, including the removal of a broad cross-default clause.

Lessons from Past Regulatory Action Against Australian Lenders & Financiers

The Bendigo & Adelaide Bank Federal Court Declarations

In May 2020, the Federal Court of Australia declared several terms in six standard form small business loan contracts used by Bendigo and Adelaide Bank to be unfair. Some clauses gave the bank broad discretion to vary loan terms without advance notice or a reasonable opportunity for the borrower to exit without penalty.

Other provisions allowed disproportionate responses to borrower breaches, including:

• calling a default without time to remedy the breach; or
• relying on events that created no material risk to the lender.

The unfair terms were void from the outset, while the rest of each loan contract continued to bind the parties. The contracts were also varied by replacing the unfair clauses with new clauses following negotiations between ASIC and Bendigo and Adelaide Bank.

The Prospa Advance ASIC Review & Contract Amendments

In September 2018, an ASIC review led Prospa Advance Pty Limited to amend its standard form small business loan contract under the unfair contract terms provisions of the ASIC Act. The changes applied to customers who entered into or renewed contracts from 12 November 2016.

Prospa amended early repayment terms, limited unilateral variation powers, and extended notice for fee changes to 60 days. It also:

• added remediation periods and materiality thresholds to default provisions;
• removed a broad cross-default clause and an entire agreement clause; and
• restricted indemnities covering losses caused by Prospa’s fraud, negligence or wilful misconduct.

A Practical Audit Checklist for Your Private Lender Template Suite

Reviewing Default Triggers & Financial Indicator Covenants

These checks reflect the guidance in ASIC Report 565.

1. Review each loan contract’s non-monetary default events. Could a minor breach trigger immediate enforcement?
2. For remediable breaches, confirm the small business borrower has a reasonable period to correct the issue.
3. Confirm enforcement action is supported by a materiality threshold requiring a material credit risk to the lender.
4. Check that financial indicator covenants, including loan-to-valuation ratios, are linked to the credit risk of the particular loan.
5. Confirm a breach is not automatically an event of default where it does not:
   • create a material risk of monetary default, or
   • prevent the lender from enforcing its rights against secured property.

Auditing Variation Powers & Entire Agreement Clauses

Review the template suite for any entire agreement clause that removes responsibility for statements or representations made by lender staff about how the loan contract will operate. Such wording may prevent borrowers from relying on relevant statements, and ASIC Report 565 identified it as likely to be unfair.5 refers to notice periods of 30 to 90 calendar days, depending on the facility and the effect of the change.

Check that each unilateral variation clause limits the lender’s power to defined circumstances and specified types of changes. Alternatively, ask private lender loan structuring and documentation lawyers to review the drafting.

Confirm the notice period gives the borrower a real and reasonable opportunity to repay or refinance the loan without fees, costs or other detriment. ASIC Report 565 refers to notice periods of 30 to 90 calendar days, depending on the facility and the effect of the change.

The Prohibited Conduct Penalty Regime as a Live Risk for Private Credit Funds

The Shift to Civil Penalties for Unfair Contract Terms

The reforms passed through the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) commenced on 9 November 2023. A person may contravene the ASIC Act in the following ways:

• Under Section 12BF(2A) of the ASIC Act, a person contravenes the provision by proposing an unfair term in a standard form small business loan contract.
• Under Section 12BF(2C) of the ASIC Act, applying, relying on, or purporting to apply or rely on an unfair term may create a separate contravention.

As noted above, the unfair term itself is void, while the rest of the loan contract continues if it can operate without that term under Section 12BF(2) of the ASIC Act. In addition, civil penalty proceedings under the ASIC Act can expose a lender to substantial pecuniary penalties, with each unfair term proposed capable of attracting a separate penalty under Section 12BF(2B).

Court Orders & Injunctions Against Non-Compliant Lenders

Under Section 12GND of the ASIC Act, the Court may declare a term in a standard form small business loan contract unfair on an application by ASIC or a party to the contract. The declaration can affect the lender’s ability to enforce the term and may expose related loan documents to further orders.

In addition, the Court has further powers under the ASIC Act, including:

• Under Section 12GNE of the ASIC Act, the Court may void, vary, or refuse to enforce the contract or a related arrangement.
• Under Section 12GNF of the ASIC Act, the Court may prevent a lender from including or relying on the same or a substantially similar unfair term in future standard form contracts.
• Section 12GD of the ASIC Act also permits injunctions against conduct that constitutes, or would constitute, a contravention.

Conclusion

Private lenders should review each standard form small business loan contract and security document for unfair contract terms, with close attention to default triggers, variation powers, indemnities, financial covenants and entire agreement clauses. The review should test whether each term is transparent, protects a legitimate lending interest and creates a fair response to borrower breaches.

With these checks complete, contact GRM LAW’s loan structuring and security documentation lawyers for advice on your loan structuring and security documentation. Our Queensland private lenders and non-bank finance lawyers can help assess loan documents against the unfair contract terms law, reduce drafting risks and support clearer protections for small businesses. diligence, reporting entities’ obligations and the application of the AML/CTF Act to your financial services.

Frequently Asked Questions

Disclaimer: This is general information only and is not legal advice. For advice on your circumstances, contact GRM LAW.