better banking

Hard luck for new café owners

07 Dec 2016

Mr and Mrs T asked their bank for a $100,000 business loan to purchase a café and cover initial set up costs. Mrs T would work as the café’s cook and Mr T would continue in his existing job. To determine whether Mr and Mrs T could afford the loan, the bank asked them for earnings information. Mr T’s income was verified by bank account statements but Mrs T had no earnings until after they bought the café. She provided a cash flow forecast showing estimates of her future income but the bank wanted verification. It asked for the café’s full financials but these weren’t provided. It then obtained the previous cook’s IRD statement from the café vendor. The bank then concluded that Mr and Mrs T could afford the loan.

Unfortunately, Mr and Mrs T quickly learned café turnover was only a third of what the vendor said it was. The full financials were never provided to Mr and Mrs T but had they been, the low business income would have been revealed. Within months, Mr and Mrs T sold the café at a significant loss. They then complained that the bank shouldn’t have given them the loan because it should have known the business was unsuccessful.

It’s the customer’s job to ensure they are purchasing a sound business and there is no obligation for banks to conduct due diligence. However, we investigated Mr and Mrs T’s complaint to see whether the bank had reasonably assessed their loan application. In particular, we focused on whether the bank had adequate information to satisfy itself that they could afford the loan and whether there was anything that put it on notice of concerns about the information’s reliability.

The bank advised it didn’t use café earnings projections as part of its affordability assessment. It only considered whether the couple’s incomes were sufficient to service the debt. It was reasonable for the bank to use the previous cook’s IRD statement when the full financials weren’t provided because this information was used to verify Mrs T’s income, not the business’ future earnings.

While the café sale and purchase agreement required the vendor to provide them with full financials, there was no contract between the bank and Mr and Mrs T which required this. The couple suspected the IRD statement was forged but we were satisfied it was legitimate. Mr and Mrs T met the bank’s lending criteria and it was for the bank to decide whether it would give them the loan. We concluded that the bank had taken reasonable steps to seek information to satisfy itself Mr and Mrs T could afford the loan. We explained this to them and they agreed to withdraw their complaint.