Quick answer
Many businesses and properties are held in family or unit trusts. A trust can borrow or provide security through its trustee, provided the trust deed gives the trustee power to do so. Lenders review the deed, confirm the trustee's identity and authority, and usually require directors of a corporate trustee to give personal guarantees. Having the deed and any variations ready avoids delays.
Key points
- The trustee borrows or gives security, not the trust itself
- The trust deed must allow borrowing and giving security
- Lenders check every variation and change of trustee
- Directors of a corporate trustee usually sign guarantees
- Get accounting advice on how the loan fits the trust
Trusts are common in Australian business
Family trusts, discretionary trusts and unit trusts are widely used by Australian business owners and property investors. They can offer asset protection, flexibility in distributing income and a way for several parties to co-own an investment. Many trading businesses operate through a trust, and many investment properties are held in one.
When a trust is involved in a loan, either as the borrower or as the owner of the security property, the lender needs to understand the structure. A trust is not a separate legal entity like a company. It is a relationship in which a trustee holds assets for beneficiaries. The trustee, whether an individual or a company, is the one who signs loan documents.
What lenders review
The trust deed. The deed sets out the trustee’s powers. Lenders read it to confirm the trustee can borrow, mortgage trust property and, where relevant, give guarantees or security for the debts of others. They need the original deed and every variation since.
The trustee. The lender confirms who the current trustee is. If the trustee has changed, it will want the deed of appointment and retirement. Where the trustee is a company, the lender searches the company and identifies its directors.
The beneficiaries. For discretionary trusts, the lender may want to know who the main beneficiaries are, particularly if the loan benefits a related company rather than the trust itself.
Unit holders. For unit trusts, the lender may want the unit register and evidence that unit holders support the transaction where the deed requires it.
Borrowing versus giving security
There are two common situations. In the first, the trustee borrows for the trust’s own business, such as a trading trust funding working capital. In the second, the trust owns a property that is offered as security for a loan to a related company or individual. The second situation is effectively third-party security, and lenders look closely at whether the deed allows it and whether the trust benefits.
Guarantees
Where the trustee is a company, lenders almost always ask its directors to give personal guarantees. Where individuals are trustees, they sign in their capacity as trustee and may also sign personally. If another entity in the group benefits from the loan, it may be asked to guarantee as well.
Common problems and how to avoid them
Missing or incomplete deeds. Trusts established many years ago sometimes have lost deeds or missing variations. Locate the full set early. If a document is missing, a solicitor can advise on options.
Out-of-date trustee details. If the trustee changed but the title still shows the old trustee, it may need to be updated before settlement.
Restrictive deeds. Some older deeds limit borrowing or giving security. A deed variation may be possible, but it takes time and may have tax consequences.
Vesting dates. Every trust has a vesting date when it must end. If it is approaching, lenders may be cautious. Check the date in the deed.
Tax issues. Borrowing within a trust or using trust property for another entity’s debt can have tax effects. Talk to your accountant.
Self-managed super funds
SMSFs are trusts, but superannuation law restricts how they borrow and what their assets can secure. In general, SMSF property cannot be used as security for a business loan. If your business premises are owned by your SMSF, a lender will generally look to other property for security.
Documents to have ready
- A complete copy of the trust deed and all variations
- Any deeds of appointment or retirement of trustees
- A company search for any corporate trustee
- The unit register for unit trusts
- A title search showing the property in the trustee’s name
- Recent financial statements or tax returns for the trust, if available
Illustrative example
A family trust owns an investment unit with significant equity. The family’s trading company needs a short-term loan to pay a tax debt. The trust deed allows the trustee, a company controlled by the parents, to give security for related entities. The lender reviews the deed and its one variation, confirms the trustee’s directors, and takes a mortgage over the unit, with the trustee and its directors signing guarantees. The accountant confirms the arrangement works for the trust’s tax position.
This example is illustrative only.
Timing matters more with trusts
Trust structures add steps to any loan. The lender’s solicitor needs time to review the deed and variations, and questions about trustee powers can take a few days to answer. If your loan is urgent, send the trust documents with your first enquiry rather than waiting to be asked. Where a deed is long or has many variations, a short summary from your accountant listing the trustee, the key powers and each variation can speed up the review considerably.
Corporate trustees and company records
When the trustee is a company, keep its ASIC records current. Lenders search the company and compare the directors and registered office with what you provide. Outdated details, such as a director who resigned years ago but was never removed, create delays at the worst moment. A quick company search before you enquire can reveal these issues while there is still time to fix them.
Getting started
If your business or property is held in a trust, check your eligibility with no credit check. Let us know the trust type, who the trustee is and what the funds are for, and we will tell you what a lender will need to see.
Start your enquiry when ready.
Frequently asked questions
Can a family trust provide security for a company loan?
Often, yes, if the trust deed allows the trustee to give security for third parties. Lenders check the deed and may require evidence the trustee considered the benefit to beneficiaries.
What if I cannot find the original trust deed?
Lenders usually need a complete copy. Your accountant or the solicitor who established the trust may hold one. If it is lost, legal advice is needed before proceeding.
Do beneficiaries need to sign?
Usually not. The trustee signs. Some lenders ask adult beneficiaries to acknowledge the loan in certain situations.
Is a self-managed super fund a trust for lending purposes?
An SMSF is a trust, but strict superannuation rules limit borrowing and security. Most business lenders cannot accept SMSF property as security for a business loan.
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