Alex is Sprintlaw's co-founder and principal lawyer. Alex previously worked at a top-tier firm as a lawyer specialising in technology and media contracts, and founded a digital agency which he sold in 2015.
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If you run your small business through a family trust (also called a discretionary trust), you may be considering external finance to buy equipment, fund growth or smooth cash flow.
The good news is that, in Australia, a family trust can borrow money. In practice, it’s the trustee that takes out the loan on behalf of the trust.
In this guide, we’ll walk through how trust borrowing works, what lenders usually require, how to document related‑party loans properly, and the key legal steps and documents to have in place so your business stays protected.
Can A Family Trust Borrow Money In Australia?
Yes. A family trust can borrow funds provided the trustee has the power to do so under the trust deed.
In most cases, a corporate trustee (a company acting as trustee) signs the loan. The trustee must borrow for proper trust purposes and on terms that are consistent with the deed and the trustee’s duties.
If your deed is silent or restrictive on borrowing or granting security, you may need a deed update before proceeding. Lenders will usually ask to review the deed to confirm the trustee’s powers.
If you haven’t set up the trust yet-or you’re looking to tidy up your structure before seeking finance-make sure you understand the core Trust requirements in Australia, including the role of a corporate trustee, ABN/TFN, and basic registration steps.
How Family Trust Borrowing Works
1) The Trustee Is The Borrower
The trust itself isn’t a separate legal entity. The trustee contracts with the lender and is personally liable to the lender, with a right of indemnity (reimbursement) from trust assets for proper trust liabilities. Many loan documents include “limited recourse” wording to confine the lender’s recourse to trust assets-but this depends on negotiation and lender policy.
2) Corporate Trustee Vs Individual Trustee
Lenders commonly prefer a corporate trustee because it provides clearer separation between business risk and your personal assets, and simplifies enforcement and ongoing administration. If you currently have individual trustees and plan to borrow, consider whether changing to a corporate trustee is appropriate before you apply.
3) Powers In The Trust Deed
Read the deed and any amendments carefully. Look for explicit powers to:
- Borrow money and enter into finance documents
- Grant security over trust assets (e.g. PPSR security, mortgages)
- Give guarantees or indemnities (sometimes needed for group financing)
Where a power is missing or restricted, ask a lawyer about a deed variation.
4) Security And The PPSR
Business lenders often require security over trust assets via a General Security Agreement (GSA) and a registration on the Personal Property Securities Register (PPSR). This preserves priority and can be critical if other creditors are involved or in an insolvency scenario.
It’s important to understand what the PPSR is and how registrations affect your assets and priority. If you’re granting a GSA or taking security for a related‑party loan, make sure you properly register a security interest within the required time frames.
What Will Lenders Require?
Every lender is different, but small business borrowers using a family trust can expect the following.
Security Package
- General Security Agreement over trust assets (and corporate trustee assets if relevant)
- Specific security (e.g. equipment finance) or a mortgage if real property is involved
- Personal guarantees from directors or adult beneficiaries/controllers of the trust
Before signing, weigh the risks of Personal Guarantees carefully. A guarantee exposes your personal assets if the trust defaults.
Some lenders may also use or ask you to provide bank guarantees in limited scenarios (e.g. lease obligations). This isn’t a loan, but it is part of the broader security picture and fee structure.
Serviceability And Financials
- Up‑to‑date trust financial statements and tax returns
- Cash flow forecasts and business plan supporting the use of funds
- Evidence of revenue, contracts or purchase orders (where relevant)
Where a trust has a short trading history, lenders may rely more heavily on guarantees and security.
Loan Documentation
Your lender will provide its loan and security documents. If you’re borrowing from a private lender or related entity, you’ll need to put in place a robust Loan Agreement and, if security is required, a General Security Agreement to protect both sides and keep terms clear.
Related‑Party Loans To A Family Trust
Many small businesses fund their trust via loans from founders, a related company, or even adult family members. This is common, but there are traps to avoid.
Arm’s Length Terms
Document the loan in writing, including amount, interest (if any), repayment schedule, events of default, and whether it’s secured. Aim for arm’s length terms and keep good records-especially if the trust pays interest or repayments back to a related entity.
Company Beneficiaries And Division 7A Risks
If a company makes a loan to the trust, or the trust has an unpaid present entitlement (UPE) to a company beneficiary, there may be Division 7A tax issues. While we don’t provide tax advice in this article, you should speak with your accountant early to ensure any inter‑entity loans or UPEs are managed correctly to avoid unintended tax consequences.
Protecting Both Sides
For larger related‑party loans, consider taking security and lodging a PPSR registration to establish priority. Treat it like you would with an external lender-formal documents, clear terms, and proper registrations help prevent disputes and protect your position.
Step‑By‑Step: Borrowing Through Your Family Trust
1) Confirm Your Structure And Deed
Check who the trustee is (ideally a corporate trustee) and review the trust deed. Confirm the trustee’s power to borrow, grant security and give guarantees. If needed, arrange a deed variation before you apply.
2) Clarify The Use Of Funds
Be clear on why you’re borrowing and how it supports business growth (e.g. equipment purchase, working capital, fit‑out). Have a simple business case and cash flow plan ready.
3) Prepare Financials And Supporting Documents
Bring your financial statements up to date, gather tax returns, bank statements, aged payables/receivables, and any contracts that evidence income.
4) Decide On Security And Guarantees
Work out what security you can offer and who will guarantee. Understand the consequences of guarantees and seek advice before committing.
5) Get The Paperwork Right
- Negotiate loan terms and interest rate
- Review and sign loan and security documents (or put in place your own Loan Agreement for related‑party funding)
- If security is granted or received, ensure you register a security interest promptly
- Pass trustee resolutions authorising the transaction and execution
6) Keep Proper Records And Comply Ongoing
File all documents (deed, resolutions, loan, security, PPSR receipts). Track repayments and interest accurately. If your trustee is a company, ensure directors continue to monitor solvency and comply with director duties.
Key Legal Documents To Put In Place
The right documents reduce risk and make your borrowing process smoother.
- Trust Deed (and Variations): Must allow borrowing, security and guarantees. Lenders will likely review this.
- Trustee Resolutions: Authorise the loan, security and execution under the deed and any company signing provisions.
- Loan Agreement: Sets out the amount, interest, repayments, defaults and enforcement. Use a tailored Loan Agreement for private or related‑party loans.
- General Security Agreement (GSA): If security is involved, a General Security Agreement outlines the collateral and enforcement rights.
- PPSR Registration: For any security interest, make sure a timely PPSR registration is lodged to preserve priority. If you’re new to this, start with the basics of the PPSR and the steps to register a security interest.
- Guarantee And Indemnity: Lenders often require personal guarantees from directors or controllers. Understand the scope and risks before signing any guarantees.
Depending on the transaction, you might also see mortgages, equipment finance agreements or special conditions. Always review documents carefully and get advice before you sign.
Risks, Compliance And Practical Tips
Understand Liability And Indemnity
Trustees are personally liable to lenders, but they usually have a right to be indemnified from trust assets for proper liabilities. If the trustee acts outside its powers or for an improper purpose, that indemnity may be lost-leaving the trustee exposed. Keep everything within the deed and the trust’s business purpose.
Be Careful With Personal Guarantees
Guarantees are common, but they put your personal assets on the line. Before agreeing, clarify the cap (if any), what triggers payment, and how it interacts with security over trust assets. Revisit our guide to Personal Guarantees for a deeper look.
Directors’ Duties For Corporate Trustees
If your trustee is a company, directors must avoid insolvent trading and act in the best interests of the company as trustee. Monitor cash flow closely and don’t borrow beyond serviceability.
Secure Related‑Party Loans Properly
If you or a related entity is funding the trust, treat it like a third‑party loan. Put a written Loan Agreement in place, consider security, and register on the PPSR if appropriate to safeguard priority.
Watch The Tax Angle
Inter‑entity loans, UPEs and corporate beneficiaries can raise complex tax issues (e.g. Division 7A). Work closely with your accountant before moving funds between a trust and a related company to avoid avoidable tax outcomes.
Insurance And Contingencies
Debt increases risk. Consider appropriate business insurance and maintain a cash buffer for repayments, interest rate movements and seasonal dips in revenue.
Key Takeaways
- A family trust can borrow money in Australia, but the trustee signs the loan and must act within the powers in the trust deed.
- Lenders typically require security (often a GSA with PPSR registration) and personal guarantees, so understand exactly what assets are at risk.
- If you’re arranging related‑party funding, use a written Loan Agreement, consider security, and register on the PPSR where appropriate to protect priority.
- Review your deed early and pass trustee resolutions authorising the borrowing, security and execution to keep everything compliant.
- For corporate trustees, directors must monitor solvency and comply with duties; don’t borrow beyond realistic serviceability.
- Division 7A and other tax issues can arise with company beneficiaries and inter‑entity loans-coordinate closely with your accountant.
If you’d like a consultation on borrowing through your family trust for your small business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.
