As more small business owners in New Zealand face financial difficulties, an increasing number are putting their family homes at risk by using them as collateral for business loans. Recent reports detail that business loan defaults have increased, leaving personal assets, particularly homes, vulnerable to foreclosure.
According to Financial Services Complaints Limited (FSCL) and the latest Credit Insights Report from Credit Bureau’s Centrix, “business defaults are up 33% year-on-year.” Many business owners, struggling with cash flow problems and rising costs, have found themselves unable to meet their repayment obligations, prompting lenders to secure their debt by placing caveats on properties, including family homes.
FSCL has seen a rise in complaints from struggling business owners who are finding it increasingly difficult to repay their loans. Centrix’s latest report shows that nearly half a million New Zealanders are behind on their debts. In some cases, business owners have reported the loss of not only their own homes but also those of family members listed as guarantors.
One recent case involved a man who took out a $50,000 business loan, confident that his new contract would generate $200,000 in revenue. However, within a few weeks, he defaulted on his payments, leading to caveats being placed on his family home. In this instance, the FSCL was able to intervene and managed to negotiate a settlement, but the case exemplifies the precarious position many business owners find themselves in. Without affordability checks required by consumer lending laws, many are left facing insurmountable debts.
The core issue lies in the lack of consumer protection for business loans under New Zealand’s Credit Contracts and Consumer Finance Act (CCCFA). Unlike personal loans, business loans are excluded from responsible lending obligations, meaning lenders are not required to assess whether a borrower can afford the loan before approving it. This can lead to risky lending practices and exacerbate the financial strain on business owners.
For example, business loans do not allow borrowers to apply for hardship provisions, which are legally available for personal loan holders. This gap in consumer protections leaves business owners with few options when they encounter financial difficulties. Financial Ombudsman Susan Taylor has repeatedly warned that many borrowers are unaware of the heightened risk associated with securing business loans using personal assets like family homes.
A growing number of small business owners are using personal property as collateral for loans, unaware of the severe consequences should their businesses fail. Insolvency practitioner Keaton Pronk of McDonald Vague reports a notable increase in personal receivership cases, where creditors have seized personal assets to recover business debts. Since June 2023, personal receiverships have surged, with 31 cases recorded in August 2024 alone.
The consequences of such defaults are severe. Lenders can initiate the sale of family homes to recoup losses. In one tragic case, a business owner’s elderly parents lost their home after their daughter failed to repay a business loan secured against the property. As economic pressures increase, experts warn that more New Zealand families could face similar situations.
Adding to the problem is the emergence of lenders offering “quick and easy” business loans with minimal vetting and high interest rates. Such loans often carry interest rates exceeding 20%, with even higher penalties for late payments. Financial experts warn that these lending practices trap business owners in cycles of debt as they struggle to meet the repayment terms, especially during periods of economic downturn.
Pronk confirmed that many of these high-risk loans come from second and third-tier lenders, who are more aggressive in pursuing personal assets when businesses fail. He emphasised that while some lenders focus on securing business assets, the number of cases where family homes are on the line is increasing.
Financial advisors and legal experts are urging small business owners to seek independent advice before securing business loans with personal assets. Engaging a financial mentor or business advisor early on can help avoid a crisis, providing options to restructure debt or explore alternative funding sources.
Financial Ombudsman Susan Taylor advises that many business owners could avoid personal receivership by renegotiating terms or finding alternative solutions before it’s too late. “It is in both the lender’s and borrower’s interests that loan repayments are affordable allowing the debt to be repaid without difficulty,” says Taylor. “If small business owners are struggling, we suggest they seek the help of a financial mentor, or a business adviser. It is better to have these conversations sooner rather than later. As you run out of time, your options become fewer, debt is often significantly higher, and the risk of losing assets, much greater.”
