How Your Business Structure Affects Finance

When a business applies for finance, one of the first things a lender wants to know is what kind of business it is. Not the industry, the structure: sole trader, partnership, company, trust, or not-for-profit. The structure decides who the borrower actually is, who has to sign, who guarantees the loan, what documents are needed, and how the asset is treated for tax. This guide walks through each structure, from simplest to most complex, so you know what to expect before you apply. It’s general information; choosing or changing a structure is a decision for your accountant and lawyer.

Why structure matters to a lender

A lender is answering four questions, and the structure answers them differently each time:

• Who is the borrower? The legal entity the loan is made to.
• Who signs? The people authorised to commit that entity.
• Who guarantees? Who personally stands behind the loan if the entity can’t pay.
• What proves the income? Which documents show the business can service the loan.

Get these straight for your structure and an application runs smoothly. Get them wrong and it stalls on paperwork.

Sole trader

The simplest structure. You and the business are legally the same person, trading under your own name or a registered business name with an ABN.

• Borrower: you, personally.
• Who signs: you.
• Guarantee: not needed as a separate document, because you’re already personally liable for the loan.
• Documents: your ID, ABN, and proof of income. That can be tax returns and notices of assessment, or on a low doc basis, business bank statements, BAS or an accountant’s declaration. Our guide to who qualifies for a low doc business loan covers what’s accepted.
• What to know: your personal credit file is the credit file. Lenders assess you as an individual, which makes the application straightforward but means personal and business credit history are the same thing. And because you’re personally liable, the asset and your personal position are both on the line.

Partnership

Two or more people (or entities) carrying on business together, usually under a partnership agreement.

• Borrower: the partnership, in the partners’ names.
• Who signs: generally all partners, or those authorised under the partnership agreement.
• Guarantee: partners are jointly and severally liable, meaning each partner can be pursued for the whole debt, not just their share. Lenders often still take guarantees from each partner to make that explicit.
• Documents: the partnership agreement, the partnership’s ABN and tax returns, and each partner’s ID and personal position.
• What to know: every partner’s credit file is in play, and one partner’s poor history can affect the whole application. Lenders also want to see the partnership agreement to confirm who can commit the business to borrowing.

Company (Pty Ltd)

A proprietary limited company is a separate legal entity from its owners. It owns its assets, carries its debts, and has directors who run it and shareholders who own it.

• Borrower: the company.
• Who signs: the directors, in line with the company’s constitution (often one director for a sole-director company, or two for a multi-director one).
• Guarantee: almost always required from the directors personally. The company is the borrower, but because it’s a separate entity with limited liability, lenders want a person standing behind the loan. Director guarantees are standard in business finance, not a sign of a weak application.
• Documents: company ABN and ACN, the company’s financials or tax returns (or low doc alternatives), plus each director’s ID and personal position. Lenders will check the company’s details on the ASIC register and each guaranteeing director’s credit file.
• What to know: the company’s trading history and the directors’ credit histories both count. For a new company, lenders lean heavily on the directors. And if the company provides a car that a director uses privately, fringe benefits tax enters the picture; our guide to business car tax deductions explains that.

Trust

The structure people find most confusing, and the one where applications most often stall. A trust isn’t a legal entity that can sign for itself; it’s an arrangement where a trustee holds assets and carries on business for the benefit of the beneficiaries. The trustee can be an individual or, very commonly, a company set up for the purpose (a corporate trustee).

• Borrower: the trustee, in its capacity as trustee of the trust. So the loan is to “XYZ Pty Ltd as trustee for the XYZ Family Trust,” or to an individual as trustee.
• Who signs: the trustee. If it’s a corporate trustee, its directors sign.
• Guarantee: if there’s a corporate trustee, its directors will generally be asked to guarantee personally. Some lenders also take guarantees from adult beneficiaries in certain trusts.
• Documents: everything a company needs, plus the trust deed. Lenders read the deed to confirm the trustee has the power to borrow and to give security over trust assets. A deed that doesn’t clearly allow it, or that’s been varied without the paperwork, is the single most common reason a trust application gets held up.
• Can a trust get a loan? Yes, routinely. Trusts finance vehicles, equipment and property every day. The key is having the trust deed available and correct, and understanding that the trustee is the borrower. If your trust’s deed is old or you’re not sure what it allows, ask your accountant or lawyer before applying rather than after.

Not-for-profit and incorporated association

Community organisations, sporting clubs, churches and charities often operate as incorporated associations (registered under state law) or as companies limited by guarantee. They finance buses, vehicles and equipment like any other organisation, with a few differences.

• Borrower: the association or company itself.
• Who signs: the office holders authorised under the constitution, usually with a committee or board resolution approving the borrowing. Lenders will ask for that resolution.
• Guarantee: personal guarantees from committee members are less common than director guarantees in a company, because volunteers rarely accept personal liability for an organisation’s debt. Lenders therefore rely more on the organisation’s finances and on the asset as security.
• Documents: the constitution or rules, the certificate of incorporation, the resolution to borrow, recent financial statements, and ID for the authorised signatories.
• What to know: applications are usually straightforward if the organisation’s finances are healthy and the paperwork is in order, but they take longer if the resolution and signatory authority aren’t sorted upfront. We’ve written separately about finance for not-for-profits.

The same asset, different treatment

Beyond who signs, the structure changes two practical things. Tax treatment differs: what’s claimable, by whom, and whether fringe benefits tax applies, all vary by structure, which is why the finance structure (chattel mortgage or lease) is worth choosing with your accountant. Our guide to chattel mortgages covers the most common option. Lender assessment differs too: a sole trader is assessed as a person, a company as an entity plus its directors, a trust as its trustee plus the deed. Low doc options exist across all of them, which is where low doc business loans come in for businesses that can’t produce full financials.

If your structure changes

Businesses restructure, sole traders incorporate, family businesses move into trusts. If that happens during a loan, tell the lender. The borrower on the contract is the entity that signed it, and the new structure will usually need the finance refinanced or formally assigned rather than simply carried across.

Where a broker fits

Structure is where business finance applications most often get tangled: the wrong signatory, a missing deed, a resolution nobody thought to pass. A broker who deals with all of these structures daily knows what each lender will ask for and gets it lined up before the application goes in, which is the difference between a clean approval and weeks of back-and-forth. Whether it’s equipment finance, a vehicle, or a broader business loan, the structure is the first thing we sort out.

This article is general information only and is not legal, tax or financial advice. Choosing or changing a business structure is a decision for your accountant and lawyer.

Damo Treadgold is the director of Treadgold Finance, an FBAA-accredited finance broker on the Sunshine Coast, arranging equipment, vehicle and business finance for sole traders, companies, trusts and not-for-profits Australia-wide.

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