The business purpose declaration, explained

Among the stack of documents for a private business loan, there’s usually a single page that many borrowers sign without much thought: the business purpose declaration. It’s worth more attention than that. This one page determines which legal framework applies to your loan. This guide is general information, not legal advice, and your own solicitor should explain the declaration before you sign it.

What the declaration says

A typical business purpose declaration is a short statement, signed by the borrower and often the guarantors, confirming that the credit is to be used wholly or predominantly for business or investment purposes, or both. It usually includes a warning, set out in a prescribed form, that by signing you may lose protections you would otherwise have under consumer credit law.

Some declarations also ask you to describe the purpose in your own words, for example “to pay overdue business tax debts and purchase stock for the company’s operations”.

Why lenders ask for it

Australian consumer credit law, including the National Credit Code, applies to credit provided to individuals wholly or predominantly for personal, domestic or household purposes. Home loans, car loans and credit cards for personal use are covered. Loans predominantly for business purposes generally aren’t.

That distinction matters a great deal to lenders. Consumer credit carries extensive obligations, including licensing, responsible lending assessments and specific disclosure requirements. Many private lenders only lend for business purposes and aren’t set up to provide consumer credit.

The declaration helps a lender establish, at the time the loan is made, that it’s a business loan. Under the Code, a declaration in the prescribed form is generally presumed to be correct, unless the lender knew or had reason to believe the credit was actually for personal purposes. That’s why lenders also ask questions and look for supporting evidence of the purpose.

What counts as a business purpose

Business purposes generally include:

• paying business debts, including ATO debts relating to the business
• buying stock, equipment or vehicles for the business
• funding wages and other operating costs
• buying business premises or another business
• funding a contract or project
• refinancing existing business debt
• investment purposes, such as buying an investment property, depending on how the lender treats them

Purposes that are generally personal include:

• buying, renovating or refinancing your own home for personal use
• paying personal credit cards or personal loans
• buying a car for personal use
• holidays, school fees or household expenses

The test is how the money is used, not who borrows it or what property secures it. A loan secured by your family home can be a business loan if the money funds the business. A loan to a company can still raise questions if the money ends up paying the director’s personal debts.

Mixed purposes

Sometimes a loan has more than one purpose, such as clearing a business tax debt and a personal credit card. If the business part is predominant, it may still be a business loan, but the lender will want to understand the split. Be open about it. A lender that later discovers an undisclosed personal purpose may treat it as a default, and a declaration that turns out to be false can create legal problems for you.

If most of what you need is personal, a business purpose loan isn’t the right product. Speak to a consumer credit lender or adviser instead.

Why accuracy matters

Signing a declaration you know to be untrue is a serious matter. It can:

• breach the loan contract, giving the lender grounds to call a default
• expose you to legal liability
• make it harder to rely on protections you might otherwise have
• damage your relationship with the lender and future lenders

Lenders can and do check how loan funds are used. If funds are paid directly to the ATO, a supplier or a vendor at settlement, the purpose is clear. If funds go to your account, the lender may ask for evidence later.

Your protections as a small business

A business purpose loan doesn’t leave you without protection. Small businesses are covered by unfair contract term laws, which apply to many standard form loan contracts. Some disputes with lenders can be taken to the Australian Financial Complaints Authority if the lender is a member. ASIC also publishes guidance on disputes about commercial loans. Your solicitor can explain how these apply to your situation.

Independent legal advice

Most private lenders require you to receive independent legal advice before signing, and the declaration is one of the main reasons. The solicitor explains what the declaration means, confirms you understand that you may be giving up consumer protections, and signs a certificate saying the advice was given. This protects you and gives the lender confidence the declaration was made knowingly.

How to get it right

1. Write down the purpose before you enquire. List each use of the money with amounts.
2. Gather supporting documents. ATO statements, supplier invoices, contracts or settlement statements.
3. Raise any personal component early. Tell us and the lender upfront.
4. Ask your solicitor to explain the declaration in plain terms before you sign.
5. Use the money as declared. If plans change, talk to the lender.

A worked example

A Southport café owner needed $150,000: $110,000 to clear overdue GST and PAYG, $25,000 to replace a coffee machine and $15,000 to clear a personal credit card. Because more than 85 percent of the loan was for business purposes and the personal part was disclosed, the lender was comfortable treating it as a business loan. The ATO and supplier were paid directly at settlement, and the credit card payout was shown on the settlement statement. Everything matched the declaration.

Guarantors and the declaration

Guarantors are often asked to sign an acknowledgement too, confirming they understand the loan is for business purposes. This matters most for a guarantor who isn’t involved in the business, such as a spouse or parent who co-owns the property. They should understand that the business purpose of the loan affects the protections available to them as well. That’s one more reason lenders insist on separate, independent legal advice for each guarantor rather than a single solicitor advising everyone together. A guarantor who signs after proper advice is far less likely to face, or raise, a dispute later.

Ask us about your purpose

Tell us what the money is for when you enquire. We’ll tell you whether it fits a business purpose loan. There’s no credit check when you first enquire, and your details stay with our desk. Accurate answers mean the right lender and the right documents first time.

Check your eligibility, or read about the three questions every private lender asks first.