Business Finance and Consumer Credit: When the Rules Apply to Your Practice

Why this matters for professional practices

Many people assume that anything borrowed for a business falls outside consumer credit law. That is not quite right. The consumer credit framework looks first at who is borrowing, then at how much and for what purpose. In professional practice finance, a significant share of borrowers are individuals in the legal sense: self-employed barristers, sole practitioner solicitors and accountants, single-handed dentists and vets, small partnerships, and partners borrowing in their own names to fund partner capital or personal tax.

Where the rules apply, they shape what information you receive, what protections you have and how the lender must deal with you. They also affect which lenders can offer the finance, because not every business lender carries on consumer credit business. Knowing the position early avoids surprises late in a transaction.

This guide explains the framework in general terms. It is not legal advice, and if you are unsure how the rules apply to a particular agreement you should take advice from a solicitor.

Who counts as an individual

The Consumer Credit Act 1974 defines "individual" more widely than a single person. Section 189 of the Act provides that it includes a partnership consisting of two or three persons not all of whom are bodies corporate, and an unincorporated body of persons which does not consist entirely of bodies corporate and is not a partnership.

• Sole traders, including most self-employed barristers and sole practitioners, are individuals.
• Partnerships of two or three partners, where not all partners are companies, are treated as individuals.
• Unincorporated associations, such as some chambers arrangements, clubs or associations, can be individuals if they do not consist entirely of bodies corporate.
• Larger partnerships of four or more partners fall outside this extended definition for their partnership borrowing, although individual partners borrowing personally are still individuals.
• Limited companies and LLPs are bodies corporate and are generally not covered by consumer credit rules for their own borrowing.

Guarantees and security given by individuals for a company’s borrowing are a separate question; a lender will explain what applies to any guarantee it asks for.

The £25,000 line and the business purposes exemption

For borrowers who are individuals, the amount of credit and its purpose are central. Credit of £25,000 or less for business purposes can be regulated consumer credit under the rules the FCA oversees. Above that amount, an exemption can apply.

Article 60C of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 provides that a credit agreement is an exempt agreement where the lender provides the borrower with credit exceeding £25,000 and the agreement is entered into by the borrower wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by the borrower.

The same article provides for a declaration. Where the agreement includes a declaration made by the borrower that it is entered into wholly or predominantly for business purposes, and the declaration complies with FCA rules, the agreement is presumed to have been entered into for those purposes. The presumption does not apply if the lender, or anyone acting on its behalf, knows or has reasonable cause to suspect that the agreement is not in fact for those purposes.

In practice this means that a sole trader or small partnership borrowing more than £25,000 for the practice will often be asked to sign a business purposes declaration. It is a meaningful document: by signing it, you are confirming the purpose of the borrowing and accepting that the agreement falls outside the regulated consumer credit protections that would otherwise apply. Read it carefully, and take legal advice if you are uncertain.

What it means in practice

Where an agreement is regulated consumer credit, the borrower generally benefits from the framework of consumer protections: prescribed pre-contract information and explanations, requirements on the form and content of the agreement, assessments of creditworthiness and affordability, and rights that may include withdrawal and early settlement. The lender must be authorised by the FCA for consumer credit lending, and anyone arranging the credit must hold the corresponding permission. The FCA’s consumer credit pages explain what firms in this market must do.

Where the business purposes exemption applies, those consumer credit protections generally do not, and the agreement is governed by its own terms and the general law. That is normal for larger business borrowing and does not mean the borrowing is outside the regulatory system altogether; it means a particular set of consumer credit rules does not apply to that agreement.

From a practical point of view, the consumer credit position affects:

• which lenders can offer the finance, since some business lenders do not offer regulated consumer credit;
• the documents you receive and sign, including any declaration;
• the affordability information the lender asks for, which for regulated agreements may be more detailed about personal finances;
• timescales, since the regulated process has required steps.

Barristers and chambers

Self-employed barristers are almost always sole traders, so any borrowing in their own name is borrowing by an individual. Typical needs include funding fee delays, tax bills, practising costs and, at the start of practice, set-up costs. Chambers themselves are organised in different ways: some operate as unincorporated associations of members, others through a service company. The structure determines whether the chambers entity is an individual for these purposes.

For a barrister seeking a modest facility to cover practising certificate costs, a tax bill or a gap in fee receipts, the amount may fall within the regulated range. For larger borrowing, the business purposes exemption and declaration may apply. See barrister and chambers finance.

Partners borrowing personally for partner capital

Partner capital loans are a common example. When a new partner joins a law firm, accountancy practice or other partnership or LLP, they are often asked to contribute capital. Many fund this with a personal loan taken in their own name, with the proceeds paid into the firm. Even where the firm is an LLP, the borrower is the individual partner, so the consumer credit position turns on the amount and the purpose.

Whether the purpose is treated as a business purpose of the borrower, and how the exemption applies, depends on the facts and the lender’s approach. Lenders active in this market deal with the question routinely, and will explain which regime applies. Our guides to partner capital loans and partner buy-in finance cover the wider picture. The same analysis applies when partners borrow personally to settle their own self assessment tax.

Sole practitioners and small partnerships

A sole practitioner dentist, optometrist, pharmacist, vet or solicitor trading in their own name, or a practice run by two or three partners, is an individual for consumer credit purposes. That covers much everyday practice finance: equipment finance, PII premium finance, working capital and tax funding. The same rules can apply to hire and leasing agreements as well as loans. For larger transactions such as practice acquisitions, the amounts involved usually exceed £25,000 and the exemption and declaration become the relevant points.

Practices that incorporate, or move into an LLP, change the position for borrowing taken by the entity. That is one of many factors in choosing a structure, and a matter for your accountant and solicitor.

Common misconceptions

• "Business borrowing is never consumer credit." It can be, where the borrower is an individual and the amount is £25,000 or less.
• "The exemption applies automatically above £25,000." It depends on the agreement being entered into wholly or predominantly for business purposes. A declaration supports that presumption, but the presumption does not apply if the lender knows or has reasonable cause to suspect the purpose is otherwise.
• "Signing the declaration is a formality." It is not. It has consequences for the protections available to you, and should be read with the same care as the loan agreement itself.
• "An LLP partner is borrowing as the LLP." A loan taken in a member’s own name is personal borrowing by an individual, even if the money is used to fund capital in the LLP.
• "Only loans are affected." Hire and leasing agreements have their own consumer hire rules, and the same questions about the borrower’s legal form, amount and purpose arise.
• "If the rules apply, finance is harder to get." Not necessarily. It may narrow the range of lenders and add steps to the process, but regulated agreements are a normal part of the market for sole traders and small partnerships.

Questions to settle before you sign

Whichever regime applies, a few questions help you understand the agreement you are entering into:

• Who exactly is the borrower: you personally, the partnership, or a company or LLP?
• Is the agreement regulated consumer credit, or does an exemption apply? If an exemption, what declaration are you being asked to sign?
• What happens if you want to repay early, and what does it cost?
• Are you giving any personal guarantee or security, and on what terms?
• What information has the lender relied on about the purpose of the borrowing, and is it accurate?

Accuracy about purpose matters in both directions. Describing personal borrowing as business borrowing to fit a product, or the reverse, can undermine the basis of the agreement. If the purpose is mixed, say so and let the lender explain how it will be treated.

How we handle it

We establish the borrower’s legal form, the amount and the purpose at the start of every enquiry. Finance of £25,000 or less for sole traders and small partnerships can be regulated consumer credit, and we will say at the outset if that applies. Where it does, we approach lenders that offer that type of agreement and explain the process. Where a business purposes declaration is likely to be part of the documentation, we tell you in advance so you can consider it properly and take advice if you wish. See how it works or make an enquiry. All finance is subject to status, lender criteria and approval. This guide is general information and not legal advice.

Common questions

This guide is for general information only and should not be treated as legal, tax, accounting or financial advice. Funding availability and lender requirements depend on individual circumstances.