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SMALL business owners on the brink of defaulting need to be careful not to lose the lot if they go belly-up.

Roger Mendelson, chief executive of Australia’s largest debt collector Prushka, warns people to consider spreading their banking around.

“If you have a loan from a bank, don’t have your credit card with the same bank,” says Mr Mendelson, a commercial lawyer with 25 years’ experience.

“You may have partners and your business loan goes into default or the bank may ask you to repay the principal, then that triggers a default with any credit cards you may have at the same bank.

“Normally the bank will insist you repay the credit card at the same time.

“My other advice for SMEs is if you have a loan and some savings on deposit, then it’s better to keep your savings at another bank. If the bank demands you repay your business loan they have a right to take your savings too without asking and apply the proceeds to your loan.

“It happens, I’ve seen it a lot, so spread your banking around a bit.”

He says people don’t understand the power of the banks over defaulting borrowers and are often shocked by how far lenders can go to recoup their loans. “If a borrower has multiple loans with the same lender, any assets connected to those loans can usually be used as security to cover defaults on other loans,” he says.

“So avoid taking out multiple loans with the one lender.

“Borrowers with debts from different sources such as credit cards, personal loans or car loans should consider consolidating their debts on to their home loan to reduce interest costs and monthly repayment rates.

From the time most loans go into default they are subject to interest at a prescribed higher rate, usually 3-5 per cent higher than the existing rate.

Mr Mendelson says borrowers should realise the power in a loan agreement is heavily weighted on the side of the lender.

He also says most non-deposit-taking lenders are uncompetitive in the current market.

“They are not writing new business and are only managing their loan book.

“As they no longer need to compete with other lenders there is little incentive to pass reductions in rates on to borrowers.”

news.com.au article