Lender vs Borrower: Key Rights and Obligations Under Australian Law

Loans can be a practical way to fund growth, smooth out cash flow, buy equipment, or take advantage of an opportunity when you don’t want to give up equity. But whenever there’s a lender and borrower relationship, there are legal rights and obligations on both sides - and if you’re a startup or SME, small misunderstandings can quickly become expensive disputes.

Whether you’re borrowing from a bank, a private lender, an investor, a related company, or even a founder/director, it’s worth slowing down and making sure the deal is properly documented, commercially sensible, and fits your broader business and tax position.

In this guide, we’ll walk through what the lender and borrower relationship really means in practice, what each party is typically responsible for, what documents you should expect to sign, and the common legal traps we see Australian small businesses run into.

What Does “Lender And Borrower” Mean In A Business Loan?

At its simplest, the lender and borrower relationship is a contract where:

• the lender provides money (or credit) to the borrower; and
• the borrower agrees to repay it on agreed terms (usually with interest and within a certain timeframe).

But in a business context, this relationship often involves more than “pay it back by X date”. For startups and SMEs, a loan arrangement can include:

• security (e.g. business assets offered as collateral);
• personal guarantees (where a director/founder personally backs the loan);
• conditions (e.g. providing financial reporting, limits on taking on more debt, or maintaining insurance); and
• default consequences (e.g. penalty interest, acceleration of repayment, enforcement against secured assets).

Because of that, it’s important to treat a loan as a legal and commercial instrument, not just a “friendly funding arrangement”. The clearer your documentation, the safer the arrangement for both lender and borrower.

Key Rights And Obligations Of The Borrower (What You’re Agreeing To)

If you’re the borrower, you’re usually taking on ongoing obligations that extend beyond simply repaying principal and interest. The exact obligations depend on the loan agreement, but these are the common ones we see in Australian startup and SME lending.

1. Repayment And Interest (Plus Fees)

The main borrower obligation is repayment in accordance with the schedule. That typically includes:

• principal (the amount borrowed);
• interest (fixed or variable);
• fees (establishment fees, ongoing fees, line fees); and
• default interest (a higher rate if you miss payments).

For cash-flow tight businesses, it’s also important to confirm when interest starts accruing, whether repayments are interest-only for a period, and whether there are break fees for early repayment.

2. Use Of Funds And Restrictions

Some loans are “purpose loans”, meaning you must use the funds only for stated purposes (for example, purchasing equipment, funding a specific project, or paying a business acquisition deposit).

Even where the loan is general working capital, lenders often include restrictions such as:

• no distributions to owners (or limits on drawings/dividends) during the loan term;
• no new debt above a threshold without consent;
• no major asset sales without consent; and
• maintaining key licences, approvals, and insurances.

3. Information And Reporting Obligations

It’s common for a borrower to agree to provide information like:

• management accounts and financial statements;
• BAS or tax-related documents;
• bank statements or cash-flow forecasts; and
• notice of significant events (e.g. litigation, insolvency risks, loss of key contracts).

These obligations can feel “administrative”, but they matter. If your loan agreement treats a reporting failure as a default, missing a deadline can create leverage for the lender even if you’re paying on time.

4. Maintaining The Business And Avoiding Default

A borrower is usually required to keep the business operating lawfully and in good standing. Depending on your industry, this could mean keeping registrations, permits, and compliance up to date.

This is also where your other core legal foundations matter. For example, if you’re collecting customer data online, weak privacy practices can turn into a legal issue and then become a loan issue. Having properly drafted Privacy Policy documents in place can reduce risk exposure that might otherwise spook a lender or trigger adverse change clauses.

5. Security And Guarantees (If You’ve Given Them)

If the loan is secured, you’re often agreeing that specific assets (or all business assets) can be enforced against if you default.

If you’ve signed a guarantee, you may also have personal exposure - even if the borrower is a company. Many founders only realise later that “limited liability” doesn’t help when you’ve personally guaranteed the debt.

Before you sign, it’s worth understanding the practical risk: if the business can’t repay, what can the lender actually take, and from whom?

Key Rights And Obligations Of The Lender (What They Can And Can’t Do)

Lenders have strong rights in most loan documents - especially in secured lending - but they’re also bound by the agreement they sign and (in many cases) by applicable laws and regulatory obligations. If you’re lending money to another business (for example, as a related entity loan, a director loan, or private loan), it’s just as important to document your position clearly.

1. Right To Be Repaid Under The Agreed Terms

The lender’s core right is repayment of the loan in line with the contract: principal, interest, and any fees. But the key point is “under the agreed terms”. A lender can’t just change the rules unless the contract allows it.

That’s why a written agreement matters for both sides. Without one, you can end up arguing about what was “agreed” - and it’s often messy to prove.

2. Right To Enforce Security (If Any)

If the lender has security, they may have rights to enforce against secured property if there is a default.

In Australia, security interests over personal property are commonly recorded on the Personal Property Securities Register (PPSR). From a borrower perspective, you should understand what is being registered and whether it could impact future fundraising, equipment finance, or business sale processes.

If you’re dealing with secured assets, a PPSR registration can be a critical step for a lender - and a critical risk item for a borrower to check before agreeing to broad security.

3. Right To Rely On Information And Warranties

Loan agreements often include “representations and warranties” - statements the borrower makes about the business (for example, that financial information is accurate, the business is solvent, and there are no major undisclosed liabilities).

If those statements are untrue, the lender may have rights to treat it as a default or pursue remedies. This is one reason borrowers should be careful not to over-promise, especially if projections are involved.

4. Obligation To Act In Line With The Contract (And Follow Proper Process)

Even though lenders may have enforcement rights, they typically must follow the procedures set out in the contract and comply with applicable laws. For example:

• giving required notices;
• allowing any contractual cure period (a window to fix the default); and
• enforcing only in permitted ways.

If you’re a lender and you skip steps, you can create disputes, delay recovery, and potentially expose yourself to claims.

What Should Be In A Loan Agreement Between Lender And Borrower?

If you only take one thing away from this article, make it this: when it comes to lender and borrower arrangements, clarity is protection.

A well-drafted loan agreement reduces the chance of disagreement and makes outcomes predictable if things go wrong. While every loan is different, here are the key clauses that are commonly included in business loan documentation.

Commercial Terms (The “Deal”)

• Loan amount and when/how it is advanced
• Interest rate (and how it’s calculated)
• Repayment schedule (weekly, monthly, bullet repayment, etc.)
• Fees (establishment, ongoing, late fees)
• Early repayment rights and any break costs

Security, Guarantees, And Priority

• Whether the loan is secured or unsecured
• What assets are secured (specific assets vs “all present and after-acquired property”)
• Guarantees (if any) and who provides them
• Priority issues (important if there are multiple lenders)

If a lender is taking security, recording it properly can be crucial. In many situations, this involves PPSR steps and (depending on the deal structure) additional supporting documents.

Borrower Promises (Covenants)

• to use the funds only for permitted purposes
• to provide reports and information
• to maintain licences, approvals, and insurance
• to avoid taking on new debt above a threshold

Default Events And Remedies

• What counts as default (missed payments, false statements, insolvency indicators, breach of covenants)
• What happens after default (default interest, repayment acceleration, enforcement)
• Notice requirements and cure periods

Practical Details That Prevent Disputes

• How notices are given (email, post, addresses for service)
• Dispute resolution steps (optional but often helpful)
• Governing law (generally an Australian state/territory)
• Entire agreement clauses (to reduce “but you said…” arguments)

If your loan arrangement is connected with other agreements - for example, you’re borrowing to fund an asset purchase, or there are co-founders involved - it can also be worth checking your broader structure and governance documents. Having a clear Company Constitution can help avoid internal disputes about who is authorised to borrow, give security, or sign guarantees.

Common Risks For Startups And SMEs (And How To Reduce Them)

Most lending disputes we see don’t start with bad intentions. They start with assumptions. Below are some common lender and borrower risks for Australian startups and SMEs - and the practical steps that reduce them.

Risk 1: “Handshake” Loans (Especially With Friends, Family, Or Related Entities)

Informal loans can feel quick and founder-friendly, but they often fall apart when the business hits a tough patch or when the lender wants certainty.

If you’re borrowing from a related party (for example, a director, shareholder, or family member), it’s still worth documenting the arrangement properly. This is particularly important for director-related funding, where company law, governance, and tax issues can arise (including Division 7A considerations for some companies). For context, a director loan can have legal and accounting implications beyond just “money in, money out”.

Risk 2: Personal Guarantees You Don’t Fully Understand

Personal guarantees can be the difference between a business loan and a personal financial event.

Before you sign, clarify:

• Is the guarantee limited or unlimited?
• Is it “continuing” (covering future debts) or only for this loan?
• Are there multiple guarantors, and are you jointly and severally liable?

This is one area where it’s often worth getting legal advice early - because once a guarantee is signed, the leverage shifts heavily to the lender.

Risk 3: Security That Blocks Future Finance Or A Business Sale

Some lenders request broad security over “all assets”. That might be reasonable in some deals, but it can also make it harder to:

• obtain equipment finance later;
• bring in new investors;
• sell the business or specific assets; or
• complete an acquisition.

If you’re buying a business or assets, it’s also worth thinking about what’s already secured and what registrations exist. A lender might want comfort that they’re not sitting behind another secured party.

Risk 4: Borrowing Without Clear Internal Authority

If you run your business with co-founders, investors, or multiple directors, borrowing can create internal conflict when decisions weren’t clearly approved.

Common questions include:

• Who can sign loan documents on behalf of the company?
• Do you need board approval?
• Do shareholders have veto rights for major borrowing?

These issues often connect to your broader company governance. If you have multiple owners, a Shareholders Agreement can help set rules around major decisions like taking on debt, granting security, or providing guarantees.

Risk 5: Default Clauses That Are Broader Than You Expect

Some loan agreements define “default” broadly. You might stay up to date with repayments, but still default because you:

• missed a reporting deadline;
• breached a covenant about new debt;
• triggered an “adverse change” clause; or
• became involved in litigation or an ATO dispute.

The practical way to reduce this risk is to negotiate the default triggers where possible and set up internal systems to meet ongoing obligations (calendar reminders, monthly reporting routines, clear responsibility allocation within the team).

What Other Legal Documents Might You Need Around Lending?

A loan agreement is often only one part of the legal picture. Depending on your business, you might also need supporting documents that reduce risk, clarify authority, and protect your commercial position.

• General Security Agreement: if the lender is taking security over business assets. Sometimes this sits alongside other documentation to support PPSR registration and enforcement. A General Security Agreement can be particularly important where lending is asset-backed.
• Directors’ resolutions: to document that the company properly approved entering the loan and any security/guarantees (especially important if there are multiple directors).
• Authority to sign: if someone is signing on behalf of the company, a written letter of authority can avoid later disputes about whether the signatory had permission.
• Supplier/customer contracts: not “lending” documents, but strong revenue contracts can reduce the business risk that sits behind the loan (and may be requested during due diligence by a lender).
• Employment contracts and policies: if staffing is a key part of your operations, clear contracts help reduce disputes and unexpected liabilities. Having a fit-for-purpose Employment Contract can support operational stability, which matters when you’ve got repayment obligations.

Not every business needs all of the above, and not every loan requires security or additional governance paperwork. The goal is to match the documentation to the risk and the size of the deal.

Key Takeaways

• The lender and borrower relationship is a contract with real legal consequences, especially when security or personal guarantees are involved.
• Borrowers typically take on obligations beyond repayments, including reporting, compliance, and restrictions on how the business operates during the loan term.
• Lenders have rights to repayment and (where applicable) enforcement, but they must still act within the contract’s processes and comply with applicable laws.
• A clear loan agreement should cover commercial terms, security/guarantees, borrower covenants, default events, and notice procedures.
• Startups and SMEs should watch for common risk areas like informal “handshake” loans, broad default clauses, and security that blocks future finance or a business sale.
• Supporting documents like governance approvals, authority arrangements, and properly recorded security can prevent disputes and protect both sides.

This article is general information only and isn’t legal, tax or financial advice. Lending arrangements can also raise regulatory issues in some circumstances (for example, if a loan is provided to an individual for personal purposes, or if a lender is in the business of providing credit). You should get advice tailored to your circumstances.

If you’d like a consultation on setting up a lender and borrower arrangement for your startup or SME, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.