Lending to trusts and companies: the structure questions that decide the file
Entity structure declines a surprising number of otherwise good files. The business is fine; the borrower is the wrong legal person, or the deed does not permit what is being asked.
Most Australian SMEs do not trade through a plain company. They trade through a trust with a corporate trustee, sometimes several, often with the property in one entity and the trading in another. That is sensible for tax and asset protection and it complicates lending in ways owners never anticipate.
The questions a lender asks are narrow and answerable: who is the legal borrower, what does the deed permit, who controls the entity, and who is on the hook. Answering them before submission is straightforward. Discovering them at documentation is not.
Company, directors are shareholders
The simplest case. Directors guarantee, the company borrows, and the only real question is whether the directors' own positions support the guarantees.
Discretionary trust, corporate trustee
The most common SME structure. The trustee borrows in its capacity as trustee, the deed has to permit it, and the lender will want the controllers identified — including the appointor, who is often not a director.
Unit trust with outside unitholders
Adds parties with an economic interest who do not control the entity. Lenders want to know who they are and whether their consent is needed, which slows the file.
Trading entity separate from property entity
Very common where the premises are owned by a related entity. It works, but the lender is often asked to take security from one entity for the benefit of another, which needs the benefit explained.
Partnership
Partners are personally liable and every partner is usually required to sign. Fine, until one partner is unreachable or unwilling.
Recently restructured group
Same operators, same customers, new entity. Some policies read the new entity as a startup regardless of the trading history behind it, which is a structural decline and not a credit one.
All of this comes from documents the borrower already has, and none of it needs a lender's involvement.
- Read the deed, specifically the borrowing power. A deed that does not clearly permit borrowing, or permits it only with a consent nobody has, is a legal problem that surfaces at documentation and costs a fortnight.
- Identify the appointor or principal. The person who can remove the trustee is who lenders regard as controlling the trust, and they are frequently not a director and frequently not expecting to be asked for anything.
- Confirm the trustee is acting in that capacity. A company that is both a trustee and a trading entity in its own right creates confusion about which assets sit where, and lenders will want it resolved.
- List every entity in the group and how they relate. Where security comes from one entity and the borrowing sits in another, the lender needs the commercial benefit explained rather than assumed.
- Establish who will guarantee. Directors, usually the appointor, sometimes unitholders. Any guarantor who is not a director generally needs independent legal advice — see security and guarantees.
- Check whether the entity was recently changed. If it was, the trading history behind it needs to be presented deliberately rather than assumed to carry across.
What each of these produces in paperwork is listed in the document checklist.
Structure tolerance is one of the sharpest differences between lender tiers. Majors have the most detailed policies and the least flexibility about unusual arrangements. Second-tier and non-bank lenders are frequently more accommodating of trusts, related-party arrangements and recent restructures, because they are used to reading them. That mapping is in who lends to Australian businesses.
This is why an entity decline is worth taking straight to another lender without changing anything, unlike a serviceability decline. Same file, different policy, different answer — which is one of the more useful distinctions on the declines page.
None of this is tax advice, and the structure a business trades through is a matter for its accountant. The broker's job is to fund the entity that exists, not to recommend a different one.
Enquiries come from the person running the business, not from an entity search. Where a business name and ABN are stated, that is what the borrower provides, and the legal structure behind it is established on your first call.
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