Choosing between a Pty Ltd company and a corporate trustee for your borrowing entity

When Private Credit Loans arranges a loan, the borrower must be an entity, not a natural person. The two most common structures we see are a Pty Ltd company borrowing in its own right and a Pty Ltd company borrowing as trustee of a trust. Both qualify. But they work differently, and the choice between them has real implications for the loan, the documentation, and the broader business structure. Our who we help page outlines the full range of entity types we work with.

The two structures at a glance

A Pty Ltd company borrowing in its own right is the simplest structure. The company is the borrower and the registered proprietor of the security property (or the entity acquiring it). The company's directors are the decision-makers and typically provide personal guarantees.

A Pty Ltd company borrowing as trustee of a trust is more complex. The company (the corporate trustee) is the legal borrower, but it borrows in its capacity as trustee of a discretionary trust, unit trust, hybrid trust, or fixed trust. The trust holds the beneficial interest in the security property. The trustee's directors still provide personal guarantees, and the trustee's right of indemnity from the trust assets provides additional security to the funder.

Lending implications

From a regulatory perspective, both structures take the loan outside the National Credit Code under section 5(1). The borrower in both cases is a body corporate, not a natural person. The funder does not need an Australian Credit Licence, and the consumer credit framework does not apply.

From a practical lending perspective, there are differences:

• —Credit assessment is similar. In both cases, the funder looks at the security, LVR, exit strategy, and the directors' personal positions. The trust structure does not change the core credit assessment.
• —Settlement speed is comparable. Whether the borrower is a company or a corporate trustee, settlement timelines for a first mortgage through our panel are typically five to ten business days.
• —Some funders have preferences. A small number of panel lenders prefer a straightforward company borrower over a trustee borrower because the documentation is simpler. This rarely prevents a deal from proceeding, but it can affect which funder is best suited.

Documentation differences

This is where the two structures diverge most visibly. A company borrower requires a standard loan agreement, mortgage, and personal guarantees from the directors.

A corporate trustee borrower requires all of the above, plus:

• —A certified copy of the trust deed, including any amendments or variations.
• —Evidence that the trustee has the power under the trust deed to borrow and to mortgage trust assets (most professionally drafted trust deeds include these powers, but the funder will want to verify).
• —A confirmation that the trustee has not been removed or replaced and that the trust has not been wound up or varied in a way that would affect the borrowing power.
• —In some cases, a resolution from the appointor or principal consenting to the borrowing.

This additional documentation is not onerous, but it needs to be prepared in advance. If the trust deed is missing, poorly drafted, or does not include borrowing powers, it can cause delays.

Asset protection

Asset protection is often the primary reason business owners use a trust structure. In a discretionary trust, the beneficial interest in the trust assets is not owned by any individual beneficiary. This means, in broad terms, that a creditor of an individual beneficiary cannot reach the trust assets directly.

A Pty Ltd company provides limited liability, but the assets of the company are exposed to the company's creditors. If the company defaults on a loan, the funder can enforce against the company's assets (including the security property).

In practice, the asset-protection advantage of a trust is partially offset by the personal guarantees that funders require. The director who guarantees the loan is personally liable up to the amount of the guarantee, regardless of whether the borrower is a company or a trustee. But the trust structure can still provide protection against other claims, such as disputes, litigation, or claims from unrelated creditors.

Tax considerations

Tax is often the deciding factor. The two structures are taxed very differently, and the right choice depends on the borrower's overall circumstances.

• —Pty Ltd company: Income is taxed at the corporate tax rate (25% for base-rate entities, 30% otherwise). Profits can be retained in the company or distributed as dividends. Franking credits may be available.
• —Discretionary trust: Income can be distributed to beneficiaries in a tax-effective manner. The trustee has discretion to allocate income and capital gains to beneficiaries in different proportions each year. If no distribution is made, the trustee is taxed at the top marginal rate.

Capital gains treatment also differs. A trust can distribute capital gains to beneficiaries who may be entitled to the 50% CGT discount (if they are individuals who held the asset for more than 12 months). A company does not receive the CGT discount.

These are complex questions that depend on the borrower's specific circumstances. Tax advice from a qualified accountant is essential before choosing a structure.

Guarantor requirements

In both structures, the directors of the borrowing entity will typically be required to provide personal guarantees. If the borrower is a corporate trustee, the funder may also require the appointor (or guardian) of the trust to provide a guarantee or acknowledgement, depending on the funder's policies.

If there are multiple beneficiaries or a complex trust structure, the funder may want to understand who ultimately controls the trust and who stands behind the borrowing. Transparency here speeds up the credit assessment.

When each structure is appropriate

• —Pty Ltd company: Simpler documentation, fewer moving parts, appropriate when asset protection beyond limited liability is not a priority, or when the company is the operating entity that needs the funds directly.
• —Corporate trustee of a trust: Better asset protection, more flexible tax treatment, appropriate when the property is held as an investment or the borrower wants to distribute income to beneficiaries. Requires a well-drafted trust deed with appropriate powers.

Practical advice

If you already have a Pty Ltd or a trust in place, borrow through that existing entity where possible. Setting up a new structure solely for one transaction is legitimate (SPVs are common in property), but it adds cost and complexity. Make sure the trust deed is up to date, the trustee's powers are adequate, and the ASIC records are current before you start the loan process.

For more on the borrower types we work with, visit who we help. To discuss a specific deal structure, submit your scenario and our team will advise on the most appropriate approach.