What is a company?

A company is a separate legal person. It can own property, enter contracts, incur debts and be sued in its own name, and the people who own it are generally not personally liable for its debts beyond what they have invested. That limited liability is one of the main reasons a business chooses to incorporate rather than trade as a sole trader or partnership.

The most common type in Australian business is the proprietary limited company, which limits the number of shareholders and cannot raise funds from the public. Public companies (Ltd) can list on the ASX and raise capital from the public, but come with heavier reporting and governance obligations. Many Australian businesses also run a company as trustee of a family or discretionary trust, in which case the trustee company borrows on behalf of the trust and lenders assess both the company and the trust deed.

Companies can use the full range of business finance: term business loans for working capital, expansion or acquisitions; equipment finance such as chattel mortgages, finance leases, hire purchase and operating leases; commercial property loans; lines of credit and overdrafts for managing cashflow; and invoice discounting against outstanding receivables. The company is the borrower, so the loan obligation sits with the company rather than with its directors or shareholders.

In practice, though, lenders almost always require directors to give personal guarantees, which make them personally liable if the company defaults. A guarantee may be limited to a set amount or unlimited, and may cover future facilities as well as the current loan. Lenders may also take security over a director's personal assets, such as a mortgage over the family home, which is common in small business and start-up lending where the company owns little itself.

Lenders typically want at least 12 to 24 months of trading history for the borrowing entity, so a new company may be offered lower limits or asked for additional security. They review the financial statements for revenue, profitability, debt serviceability and gearing, asset backing and cashflow, and they check who owns and controls the company, since a change of directors or ownership may trigger a review clause or need the lender's consent. An active ABN is a basic requirement. GST registration is compulsory once GST turnover reaches the threshold and is also available voluntarily below it, so it is a data point rather than proof of size.

Security over company assets is documented as a general security agreement over all its personal property, or a specific security agreement over named assets, and registered on the PPSR as a security interest, which lenders search before lending. Fixed and floating charge are pre-PPSA terms for non-circulating and circulating assets, and security over land goes on the state land titles register instead.

Directors carry duties under the Corporations Act that bear directly on borrowing. They must act in good faith and in the best interests of the company, not for personal benefit. They must not let the company incur debts when it is insolvent or likely to become insolvent, so taking on a loan the company cannot service can expose directors to personal liability for the shortfall. They must also exercise reasonable care and diligence, which means understanding the terms, costs and risks of a facility before signing.

If the company later enters liquidation or administration, the liquidator or administrator will examine the circumstances of its borrowings and whether the directors breached these duties.