Borrowing From a Private Individual: How to Do It Properly
Borrowing from a private individual for your business? How to document and secure the loan, the licence question, tax, and when a private fund fits better.
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Private Loan From an Individual · Security · Paperwork
If a client, a relative or a retired investor offers to lend your business the money, what turns that handshake into a loan you can both rely on? The answer is a written agreement, registered security, a clear view of the tax, and an honest look at whether a private fund would suit you better.
Quick Answer
A business can borrow from a private individual, but the loan only holds up when it is written down, secured where it should be, and set up with separate legal and tax advice for each side. It is still private lending, just with a person rather than a fund on the other side. If the relationship cannot carry that structure, a property-secured private loan through a broker's panel gives you a process instead of a favour.
Also called: private loan from a person, family business loan, friend or investor loan. A loan from a mortgage fund or a broker's panel lender is private lending too, but the lender is a business, not a person.
Can a business borrow from a private individual?
Yes, a company, a trust or a sole trader can borrow from a private individual, and plenty of Australian businesses are funded this way at some point. The lender might be a client who believes in the business, a relative, a former business partner or a retired investor who wants a better return than a term deposit and likes the idea of backing someone they know.
What changes when the lender is a person rather than a fund is everything around the money. A fund has a credit policy, standard documents and a solicitor on call. A person usually has none of that, so the structure has to be built for the deal: who lends, which entity borrows, what interest is charged, what security is given and what happens if either side needs out. The money is rarely the problem. The missing paperwork is.
The borrowing entity matters from the first conversation. If the business runs through a trust, the trustee is the borrower and signs. If it is a company, a director signs on its behalf and is usually asked to guarantee the loan personally. The goal is to turn the handshake into a loan that is written, secured where it should be, and understood the same way by both sides.
Does the individual lending to you need a credit licence?
An individual making a one-off loan to your company or trust usually does not need an Australian credit licence, because the National Credit Code is aimed at a different kind of lending. It applies where credit is provided to a natural person or a strata corporation, wholly or mainly for personal, domestic or household purposes or for residential property investment, a charge is or may be made for it, and the lender provides it in the course of a business of providing credit, or incidentally to another business (National Credit Code, s 5, "Provision of credit to which this Code applies").
A loan to your company to buy stock, fund a contract or pay down a tax debt does not fit the purpose test on its face. The grey area is a person who lends regularly. Someone who makes several loans a year, advertises, or charges fees on top of interest can start to look like they are in the business of lending, and the analysis then changes.
Whether the Code applies to your arrangement is a question for a solicitor, and it is worth asking before money moves rather than after a dispute. Private lending funds and platforms sit in a different place again; the licence question for those lenders is covered in our guide to how private lending works in Australia.
How should the loan be documented?
The loan should be documented in a written loan agreement, drafted by a solicitor, that both sides sign before any money moves. At a minimum it records who lends, which entity borrows, the amount, the interest rate and how it is calculated, when interest and principal are paid, the term, any security and guarantee, and what happens on a missed payment or an early repayment.
- Who is lending. The individual personally, or a company or trust they control. The lender's entity changes the tax, and sometimes the rules.
- Who is borrowing. The company, the trustee of the trust or you personally. Lending to the wrong entity is one of the most common and most expensive mistakes to unwind.
- How and when it is repaid. A fixed date, instalments or interest only with a final payment. "When the business can afford it" is not a term.
- What happens if either side wants out. Whether you can repay early, and whether the lender can call the loan in before the end date and on what notice.
- What happens if the lender dies or goes bankrupt. The lender's estate is still a lender, and an executor or trustee will read the agreement more strictly than a relative ever would.
Each side needs its own advice. A solicitor acting for both has a conflict the moment the loan goes wrong, and a family lender who later says they did not understand the terms is the start of a dispute, not the end of one. The clauses themselves, and the question to ask about each, are walked through in our teardown of caveat and private loan agreements.
How is a loan from an individual secured?
A loan from an individual is secured the same way as any other business loan: with a mortgage or caveat over property, a security interest over business assets registered on the PPSR, a personal guarantee from the director, or a mix of these. Without security, the individual is an unsecured creditor, and unsecured creditors are paid after secured ones if the business fails. A secured loan is what protects the person who trusted you with their money.
How does a person take security over property?
A person takes security over property with a mortgage registered on the title or, more lightly, a caveat lodged against it. A registered mortgage gives the individual a recorded interest in the land. If a bank already holds a first mortgage, the individual sits behind it as second mortgagee and usually needs the first lender's consent; how that ranking works is covered in our second mortgage guide. A caveat warns anyone dealing with the title about the lender's claim, but it only protects an interest the loan agreement actually creates, so the agreement has to create one.
How does a person take security over business assets?
A person takes security over equipment, vehicles, stock or receivables by registering a security interest on the PPSR, usually under a written security agreement. Registration is what protects the lender against other creditors. The register's own guidance is direct: a perfected interest has priority over an unperfected one, and between perfected interests priority generally runs from the earliest registration (PPSR, Which security interest has priority?, read October 2026). There are exceptions, so the lender should get legal advice before relying on the order and before enforcing.
The practical rule for an individual lender is to be registered before anyone else, and before the money is advanced, not after. If the borrower is a company, the lender will usually want the director's personal guarantee as well, which puts the director's own assets behind the debt.
How is the interest taxed for the lender and the business?
Interest on a loan from an individual is generally income for the person lending, and it may be deductible for the business when the borrowed money is used to earn the business's assessable income. That is the usual starting point; the detail depends on the entities involved, the purpose of the money and whether interest is actually paid.
The rate needs thought too. A rate far from a commercial one between related parties can draw questions, and an interest-free family loan gives the lender nothing to declare but also gives the business nothing to claim. Neither is wrong; each should be a choice made with your accountant, not an accident.
Division 7A is a separate issue. It deals with loans and payments from a private company to its shareholders and their associates, so it comes into play when the lender is a private company in the family group rather than a person. If that is your arrangement, read our post on directors' loans and Division 7A and take it to your accountant.
Keep the interest paid on time and in the amounts the agreement says. The loans that cause tax headaches are usually the ones where interest was meant to be paid and quietly was not, and nobody is sure afterwards whether it was waived, added to the balance or forgiven.
Is a loan from an individual better than borrowing through a private fund or a broker's panel?
A loan from an individual is better when you have a lender who knows the business, wants a fair return rather than a fee-driven one and will be flexible on timing. A private fund or a broker's panel lender is better when you need a defined process, a fixed settlement date and terms that do not depend on a relationship.
Private lending is no longer a niche. APRA estimates domestic private credit at around $200 billion, about 3 per cent of the size of the Australian banking system (APRA, System Risk Outlook, 21 May 2026, read October 2026). That market is mostly funds and institutions rather than individuals, which is why its paperwork looks the way it does. A fund has a process, a person has a phone number. The phone number is the flexibility, and it is also the risk if the relationship sours.
| Question | Loan from an individual | Loan through a private fund or panel lender |
|---|---|---|
| Who sets the terms | You and the lender negotiate everything | The lender's credit policy, with less room to negotiate |
| Documents | Whatever your solicitors draft; quality depends on the advice | Standard loan, guarantee and security documents drafted by the lender's solicitor |
| Security taken | Agreed case by case: mortgage, caveat, PPSR registration, guarantee, or none | Almost always property, often with a director's guarantee |
| Regulation | A one-off business loan usually sits outside the National Credit Code; contract law applies | The fund or lender carries its own obligations; business purpose loans still usually sit outside the Code |
| If the lender wants the money back | Only what the agreement allows, though personal pressure is the real risk | A fixed term, with early demand typically only on a default under the agreement |
| Cost (indicative) | Often lower and negotiable, typically with few or no fees | Typically higher rates plus establishment and other fees, varies by lender |
| Dispute route | Negotiation, then solicitors and the courts | The lender's complaints process, an external dispute scheme where the lender belongs to one, then the courts |
The cleanest outcomes come from owners who are honest about which column they are really in. Investors who want to lend against property without running a loan themselves often do it through a contributory mortgage fund instead. How a fund-funded loan works from the borrower's side is covered in our post on private mortgage funds funding your loan.
What goes wrong with loans from family, friends or investors?
Loans from family, friends or investors usually go wrong in one of five ways, and almost all of them trace back to something that was not written down at the start.
- Was it a loan or a gift? When families fall out, whether the money was a loan or a gift is decided on the paperwork, not on anyone's memory. The same question comes up with home deposits, covered in our post on family loans and gifts.
- An early demand. The lender's circumstances change, they need the money, and the business has no plan to repay ahead of time.
- The lender's bankruptcy, separation or death. A trustee in bankruptcy, a former spouse's lawyer or an executor may all have a say in a loan the business thought was settled.
- Ranking if the business fails. An unsecured individual is paid after secured creditors and may recover little or nothing.
- Mixed roles. A lender who is also a shareholder, an employee or a major customer brings every other disagreement into the loan.
Stronger fit
- One lender, one loan, signed before funds move
- Security registered before anyone else's
- A clear business purpose for the money
- A fixed repayment date and a plan to repay or refinance
- Separate solicitor and accountant for each side
Gets tricky
- Money from several relatives on different verbal terms
- No security, or security promised later
- A lender who is also a shareholder or staff member
- Repayment "when the business can afford it"
- A lender who also lends to other businesses
If your arrangement looks more like the right-hand card, a property-secured loan from a private funder may be the cleaner route, and it leaves the relationship out of it. You can check eligibility in a few minutes, or see how private lending for business owners works at Switchboard. More guides for owners are on the Business Owners Hub.
A loan from a private individual can be one of the more flexible ways to fund a business, but only when it is run like a loan. Put it in a written agreement with separate advice for each side, take security and register it, agree how interest is paid and taxed, and plan for the lender's circumstances changing. If the relationship cannot carry that structure, a private fund or broker's panel lender gives you a process instead of a favour.
Key takeaway: before any money moves, get the agreement signed and the security registered, then pay exactly what the paperwork says.Frequently Asked Questions
A private company can take a loan from an individual, provided the directors have authority to borrow and the loan is documented in a written agreement. The individual will usually ask for a personal guarantee from each director and, where there is property or business equipment, registered security. Each side should have its own solicitor.
Borrowing money from a friend for your business is legal in Australia, and a one-off business loan from a person usually sits outside the National Credit Code, though a solicitor should confirm that for your arrangement. It still needs to be treated as a real loan, with a written agreement, agreed interest, a repayment date and security where it makes sense. Our teardown of private loan agreement clauses covers what to agree.
You can write your own loan agreement, and a signed document you drafted is better than nothing, but a homemade agreement often misses the security, default and repayment terms that matter when something goes wrong. For a business loan of any size, each side should have a solicitor draft or review it. The clauses worth checking are set out in our loan agreement teardown.
Private loans from individuals do not have to be registered to be valid, but any security the lender takes should be, or the lender can lose priority to other creditors. A mortgage is registered on the land title, a caveat is lodged against the title, and a security interest over business assets is registered on the PPSR. A lender with nothing registered is usually an unsecured creditor if the business fails.
Interest on a loan from a family member may be tax deductible for your business when the money is used to earn the business's assessable income and the interest is paid under a genuine loan agreement. The family member generally declares the interest as income. Where a private company in the family group is involved, Division 7A can change the picture, as our post on directors' loans and Division 7A explains, so confirm the treatment with your accountant.
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