Loan Tip: Can a Brand New Company Borrow?

Sometimes I get asked how a brand new company or trust borrow money with no income.

Companies are limited liability entities so as a general rule no one would lend them money without taking a personal guarantee from all directors. Because of this it is income of the guarantors that is important.

In fact, if the company does have an income from trading it will generally be harder for it to get finance because trade is risky and lenders generally don’t want to lend to a trading company.

For serviceability purposes the income of the company from current rent or future rent plus the personal income (and debts) of the guarantor will be taken into account.

This is generally the case whether the company is acting as trustee or not, as long as the guarantor is a beneficiary of the trust.


Example

Seymour wants to buy a property using a company to hold it. Seymour is the director and sole shareholder, (perhaps as trustee for a discretionary trust). Seymour must give a personal guarantee to the lender.

The fact that the company was set up days ago doesn’t worry the lender because the company will borrow with Seymour’s income from his job as a school principal will be used for servicing and that and the expected rent from the property is enough to pass servicing.

 

I have a client who is very wealthy. As far as their bank is concerned they will lend them millions. They only need to call their private banker and its done. The private banker calls me and asks for details. Any name as borrower provided they are an associate entity of that individual and there is a guarantee. We could setup a new company, trust etc and the bank will lend.

Sometimes it doesnt work. Before she came to me her former accountant setup a company as owner of her apartment in Sydney (a whole floor). Took a lot of work for lawyers to fix that without a transfer duty problem. Now we discuss before she acts so I can at least involve her solicitor.

All jointly and severally liable whether by way of mortgage and/or guarantee.

This same position doesnt apply to those who arent wealthy. Basically the bank wants its position covered Having $12m of assets and $10m of debt isnt what banks want. The nature of and liquidity of net assets can also be a factor. Her $300m share portfolio is also managed by a private financial adviser at the bank. Her loans are crossed. She couldnt care less. Its a trivial issue to net assets. She prefers to borrow than sell down shares and trigger tax she sees as a cost.

One of her best was Amex offerred her a black card through her favourite airline. Her bank was horrified to be asked to give a financial reference. They immediately issued her a bank issued Black card directly. Courier delivered same day with flowers.

 

@Terry_w in the example you provided, does the bank work out servicing, for the company, using Seymour's personal circumstances? I.e. current debt and associated rent for IPs he holds, living expensives, personal loans, etc.
If Seymour has hit his servicing limit already, then his guarantee for the company to borrow is worthless?

 

Yep. Using the personal guarantee they will go off the income of the company - which is only the future rent, but also the income and debts of Seymour Butts

 

What about putting cash into the company?
Lets say Seymour wants to do a small development. He sets up a company and goes guarantor on the loan. Bank uses his income as a school principal for serviceability. Now lets say Seymour buys a block of land (using a mortgage) then he builds a house on it and funds the whole build with cash. Will he have to pay for everything (trades, materials, etc) in the company name (rather than his personal name), so that when he sells it the profit is based on the company's income minus expenses? If so, how does he get the money into the company? I guess he just deposits it into the company account, is that right?

Still trying to get my head around a company structure so go easy on me Terry!

 

why is he paying for things in the company name?

Are you saying the company buys land and develops? If so the company is a separate legal entity to its directors and shareholders. An individual should be careful when just paying for expenses of the company. They would want to loan the money to the company so that when it comes out it won't be taxed.

 

Apologies, I should have been clearer. Yes I mean the company buys land and develops. I see - that's good to know. Loan money to the company and then pay from expenses within there. Thanks once again Terry!

 

Will this company borrowing arrangement work when developing a property that is currently
owned in company's director's name? Is there a separate Loan Tip Terry? Thanks.

 

A company could borrow using someone else’s property as security but lots of issues

 

Can a trading company with Seymour as the director and sole shareholder loan money to a new company set up to purchase a property? As opposed to Seymour loaning money to the new company with savings?

 

yes