Business Loan or Not? AI Instantly Clarifies 5 Key Insights

As technology continues to transform the financial sector, one of its most practical applications is assisting credit teams in navigating complex regulatory grey areas. This is especially crucial when determining whether a loan is genuinely intended for business purposes or is a consumer loan disguised as a business loan.

In a recent case, the loan structure appeared complex, but the legal framework under the National Consumer Credit Protection Act 2009 (NCCP Act) was straightforward. Using a standard process, advanced tools assessed the borrower type, loan purpose, and security, providing a clear regulatory classification in just seconds.

The Prompt:

As a credit analyst, your task is to determine whether the proposed loan should be classified as a “coded loan” (consumer loan) under the NCCP Act or if it qualifies as a business-purpose loan. You need to evaluate the borrower, the intended use of the funds, and the security offered. Provided details include the borrowing company, its directors, intended use of funds, distribution of proceeds, existing residential loans, and company structure. Based on this information, make a determination and reference relevant cases.

Key Loan Details:

• Amount: $1 million

• Security: Two residential properties (one used for both accommodation and business)

• Borrower: A company (sole shareholder is an individual)

Purpose:

• Refinancing a $250K residential home loan (cross-collateralised)

• Paying a spouse as part of a Family Court settlement (for her equity interest)

Outcome:

• One property transferred to the spouse

• Accommodation property retained and used by the company

Legal Framework: When is a Loan Regulated?

A loan falls under regulation by the NCCP Act if:

1. The borrower is a natural person or strata corporation
   → No (the borrower is a company)

2. The credit is for personal, domestic, or household purposes
   → Partly Yes

3. The provider charges interest or fees
   → Yes

4. The loan is not excluded by regulation
   → No clear exclusion

Although the company borrower does not meet the first test, the case Karam v ANZ (2012) establishes that substance takes precedence over structure. Even when the borrower is a company, the loan may still be regulated if the company is acting as a proxy for personal borrowing.

Business Use vs. Consumer Use

Indicators of Business Use:

• The borrower is a company

• The property continues to be used for business purposes

• The property is necessary for day-to-day operations

Indicators of Consumer Use:

• A significant portion of the loan proceeds goes to the spouse (Family Court settlement)

• The loan is used to refinance a personal home loan

• The security involves residential property

• No funds are allocated for business growth or investment

Conclusion

Although the loan is issued to a company, the primary purpose of the funds appears personal. It involves refinancing residential debt and settling a family law matter. As a result, it is likely classified as a “coded loan” under the NCCP Act.

A Note on Declarations

A Business Purpose Declaration provides protection for the credit provider, but only if they have no reason to suspect the loan is for personal use. If the facts suggest otherwise, relying on the declaration could result in non-compliance with the NCCP Act.

Courts have consistently ruled that lenders are expected to act based on what they reasonably could have known from the information available.