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Accountants and lawyers tell business owners to keep valuable assets away from trading risk. The result is a group: a trading company, a property trust, perhaps a holding company and some assets in personal names. When the trading company needs funding, the equity is somewhere else. That is a structuring question, not a barrier.
The two ways to do it
| Third party mortgage | Owner borrows and on-lends | |
|---|---|---|
| Borrower | Trading company | The entity that owns the property |
| Security | Owner guarantees, mortgage supports the guarantee | Owner mortgages its own property |
| Money flow | Lender to trading company | Lender to owner, owner lends to trading company |
| Paperwork | Guarantee and mortgage from the owner | Loan agreement between the related entities |
| Points to check | Power to guarantee, corporate or trust benefit | Related party loan terms and tax treatment |
Lenders are comfortable with both. The choice is usually driven by tax and asset protection advice from your accountant.
What the lender checks
- Power. A company’s constitution rarely restricts guarantees. A trust deed must contain power to guarantee and to mortgage trust property for another’s debt. Not all do.
- Benefit. Why is this owner supporting this borrower? Common ownership and control, rent paid by the trading company, or a fee for the guarantee are typical answers.
- Solvency. Directors giving a guarantee should be satisfied their own entity remains solvent.
- Who signs. Directors of each entity, under section 127, plus personal guarantees from the individuals behind the group.
- Independent advice. Required where an individual owner, such as a spouse or parent, is not involved in the business.
Multiple properties
Security can be pooled. A factory in the property trust and an investment unit in a director’s name can together support one loan to the trading company. The lender takes a mortgage or caveat over each and sets the limit on the combined position. Discuss at the start how each property will be released as the debt is paid down, so a sale of one is not held up.
Where it does not work
- Property held in a self-managed super fund. See can SMSF property be used as security.
- A trust deed with no power to guarantee and no power of variation.
- An owner who is unwilling, or whose co-owner will not sign.
- An owner that gets no benefit and whose directors or trustee cannot justify the risk.
Practical steps
Draw the group on one page: who owns what, who owes what and who controls each entity. Send it with the trust deeds and company extracts. It answers most of a lender’s structural questions at once. See funding for companies and funding for trusts. General information only, not legal or tax advice.
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Get matched with a funderFAQ
Can security be spread across several properties in different entities?
Yes. Each owner gives a guarantee and mortgage, and the lender looks at the combined value and the combined debt.
Does the property-owning entity have to benefit?
Directors and trustees must act in the interests of their own company or trust. A clear commercial benefit, such as supporting a related business that pays it rent or is owned by the same family, should be recorded.
Does this trigger stamp duty or tax?
A guarantee and mortgage do not transfer the property, so transfer duty is not normally in play. Tax effects of lending between related entities are a question for your accountant.