The Pitfalls of Finance Letters: Understanding Risks and Alternatives for Securing Bank Financing

A variety of financial tools vital for business accountants during tax preparation and accounting, including coins, a pen, a calculator, a piggy bank, and financial data, laid out on a table.

As a client of an accounting firm, you may be considering asking your tax accountant to provide a “finance letter” in order to help you access small business finance from a bank or other financial institution. While this may seem like a useful tool for securing financing, it is important to be aware of the risks involved and the guidance provided by professional accounting bodies on this issue.

One such professional body, the Chartered Accountants Australia and New Zealand (CAANZ), has recently issued guidance to its members on the topic of finance letters, advising them to exercise a high degree of caution when considering requests to provide such letters for clients.

Why Your Accountant May Be Reluctant to Provide a Finance Letter

So why might your accountant be reluctant to provide a finance letter? The main reason is that doing so carries a high level of risk for the accountant. If a client defaults on a loan and the lender takes action against the accountant based on the statement provided in the finance letter, it is likely that the accountant’s professional indemnity (PI) insurance will not cover them. This is because many PI policies exclude coverage for “loss arising from any liability or alleged liability” in connection with providing a guarantee or indemnity.

In addition to the risk of being sued, providing a finance letter may also be considered a regulated service under the National Consumer Credit Protection Act, and may require the accountant to have specific skills and competencies. This means that the accountant may not be qualified or insured to provide such a service, and could be at risk of legal action if they do so.

Alternatives to Finance Letters

Given these risks, it is no wonder that your accountant may be reluctant to provide a finance letter. It is important to understand that this is not a refusal to help you, but rather a cautionary approach to protecting both their own interests and those of their clients.

If you are considering requesting a finance letter from your accountant, it is important to be transparent with them about your financial situation and to provide them with all the necessary information. If they have the necessary information they may be able to provide some type of support for your application that won’t fall foul of the issues raised above, while still providing you with the necessary support to get your application over the line.

You may also want to explore other options for obtaining financing, such as seeking a credit assessment from the lender or working with a financial planner for financial advice and financial planning for your specific case (our S & W Wealth division will be able to help you with this).  While a finance letter may seem like a useful tool, it is important to consider the risks involved and to protect the interests of your accountant.

If you have any queries in relation to what your needs are in relation to supporting a bank finance application, don’t hesitate to reach out and contact us.

Kreston Stanley Williamson

Author – Darren O’Malley

*Correct as of 25 January 2023

*Disclaimer – this article has been produced by Kreston Stanley Williamson as a service to its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas contained in this article, it is imperative you seek specific advice relating to your particular circumstances. Liability limited by a scheme approved under professional standards legislation.

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