When it comes to loans, business owners are often familiar with being on the borrower’s side. But what happens when you flip the script and become the lender? With a growing trend of SMEs considering lending opportunities, there’s value in understanding the benefits of secured loans, especially in terms of asset protection.
Let's explore why these loans make sense, and how they can empower you to essentially “become the bank” and enjoy the safeguarded investments that come along with that.
How Structured Loans Work
In the simplest terms, a secured loan is a loan backed by collateral – an asset the borrower pledges as a guarantee for repayment. This arrangement means that if the borrower defaults (fails to repay), the lender has the right to seize and sell the asset to recover the loan amount.
An example of when this might be used is when a non-trading company (not a risk) lends money to a trading company (at risk) within your family group structure for working capital.
Common examples of collateral include property, vehicles, equipment, and even business shares. With collateral in place, secured loans create a clear layer of protection for lenders, making them especially attractive for SMEs looking to mitigate risk.
Secured loans must be properly documented to ensure enforceability. A secured loan agreement specifies the terms of repayment and identifies the assets pledged as security.
Lenders often go a step further, using documents like a General Security Agreement (GSA) or Specific Security Agreement (SSA) to spell out their rights over specific assets in case of borrower default.
To strengthen this security, lenders can also register their interest on the Personal Property Securities Register (PPSR), providing them with a clear, legal claim over the collateral.
Benefits of Secured Loans for Lenders
So, why might you want to offer a secured loan? Here are some of the main advantages of this structuring enhancement:
Lower Risk Exposure
Secured loans reduce the risk that a lender will lose money if the borrower defaults. Since assets back the loan, lenders have a tangible way to recoup their funds. This setup is particularly advantageous for private lenders who may not have the same level of financial backing as large financial institutions but still want a high level of protection.
Asset Protection
Secured loans act as a safeguard for lenders, especially in scenarios where disputes or legal issues arise. The legal backing of a secured agreement means that your claim over the collateral is enforceable, helping you to recover your investment in otherwise challenging situations.
Clarity in Relationships
One of the biggest benefits of secured loans is the transparency they bring to lending arrangements. When money changes hands between entities or family members, assumptions and misunderstandings can arise. A secured loan formalises the terms, creating a clear framework for repayment and expectations.
How does the “Bank of Mum and Dad” Fit in?
For many families, informal lending through the “Bank of Mum and Dad” is a common practice, particularly for helping younger family members enter the housing market.
This type of lending is usually structured as an unsecured loan, often relying on trust rather than collateral. However, families might benefit from the formal structure of a secured loan, especially for larger sums.
Secured loans in this context can provide peace of mind for both parties. Here’s how:
Family Law Protections
By formalising the loan and securing it against assets (like property), parents can ensure that the loan principal is protected if their child goes through a divorce or separation. Without a secured loan agreement, family contributions may be treated as gifts and lost in a property settlement.
Estate Planning Clarity
Secured loans also play a vital role in estate planning by documenting what loans are in place. This reduces the risk of disputes among beneficiaries and ensures that family intentions are honoured.
Secured loans offer a powerful way for SMEs and even family lenders to confidently "become the bank" and protect their assets.
If you’re considering implementing secured loans for your SME or family lending, let’s start the conversation. Reach out today, and we’ll guide you through the process.
Jace joined the firm in 2005 and has over 20 years' experience in the taxation and business services field. By immersing himself within the industry, he has developed a deep understanding of the financial and operational issues that face businesses and, as a result, provides tailored solutions to bring the best possible outcome to his clients.
Jace takes a holistic approach, allowing him to plan for all aspects of his clients personal finances including their practice / business, investments and superannuation.
