Loan Tip: Trading Companies and Trusts Borrowing money

From a legal perspective a trading company or trust should generally not be owning valuable assets such as property. This is because the property will be exposed to the creditors of the entity running the business and we all know that business is risky.

Lenders understand this and they are generally wary of lending money to a company or trust that trades. They don’t want to lend and be tied up with creditors fighting over security assets if things go wrong. When running a business there are also frequent requirements for Personal Property Security charges over the assets of a company.

Therefore, as a general rule lenders won’t lend to trading trusts or companies – a trust or company that is operating a business. This also includes small one man bands operating under the PSI rules.


However, some lenders will still consider lending. The pool of lenders is much lower however. So think twice before getting your trading entity to hold property as it will be very costly to restructure at a later date if you find you can no longer get finance.


Example

Homer operates Mr Plough Pty Ltd which runs a ploughing business. The company needs somewhere to store its equipment so Mr Plough Pty Ltd buys a property and gets a loan.



After a few years the rates are high and they want to refinance. They soon find out that not many lenders will lend because Mr Plough Pty Ltd is operating a business. They are stuck with the current lender with the current rate.

 

Most lenders will also not allow trust assets to be used as security for other borrowings either. eg personal borrowings. They recognise it could be a breach of trust.