Durable Private Lending Structures: Documenting Genuine Business Purpose & Reducing Business Risks15 min read

Introduction

As the landscape of growth and risks in the Australian private credit market evolves, it faces greater regulatory scrutiny from the Australian Securities and Investments Commission (ASIC). With “poor private credit practices” designated as a key enforcement priority for 2026, the regulator is increasingly focused on loan structures that may be designed to circumvent consumer protections, thereby heightening the business risks for lenders.

Consequently, establishing and documenting a loan’s genuine business purpose is more critical than ever for reducing these business risks. This guide offers essential information and practical strategies for creating defensible lending structures, including expert loan structuring and documentation, focusing on how to maintain compliance-grade records that clearly demonstrate the commercial intent behind each transaction and lower the overall risk profile of operating companies.

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The Importance of Establishing a Genuine Business Purpose

How the National Credit Code Exemption Works for Business Loans

A foundational principle in Australian credit law, and a key aspect of private lending regulatory compliance, is that when a loan is provided to a company for a genuine business purpose, the National Credit Code does not apply. Consequently, this well-established position allows private lenders to offer unregulated business loans without needing to hold an Australian Credit Licence or be a member of the Australian Financial Complaints Authority (AFCA).

Because the National Credit Code does not apply to credit extended to corporations, lenders are not bound by specific rules regarding serviceability assessments that are mandatory for consumer loans. Ultimately, this exemption is central to the private lending market, which serves a wide range of borrowers seeking capital for various commercial reasons, including:

• Large property developers.
• Small and medium-sized enterprises.

Why Substance & Commercial Intent Outweigh Formal Documentation

Regulators and courts prioritise the true commercial purpose of a loan over the mere form of the documentation. Furthermore, the key consideration is the actual substance of the transaction, meaning that simply labelling a loan as for business purposes is not enough if the underlying reality is different.

Effective documentation ensures that the structure of the loan aligns with its commercial drivers and context. However, when evaluating the reality of a transaction, several important factors come into play:

• A mismatch between the stated purpose and the actual use of funds can introduce ambiguity and significant business risks, particularly if the loan is scrutinised later.
• The involvement of individual guarantors does not, by itself, change the nature of a business loan, provided the facility’s true commercial purpose remains for the company.

ASIC’s Increased Focus on the Private Credit Sector

ASIC’s 2026 Enforcement Priorities for Private Lenders

ASIC has identified “poor private credit practices” as a new enforcement priority for 2026. This announcement signals increased scrutiny of the sector, driven by several key factors:

• The industry has seen significant growth as traditional bank lending has tightened.
• The regulator has indicated that this focus is designed to protect consumers from financial harm, particularly in the context of cost-of-living pressures.

Consequently, this shift means private lenders face a higher likelihood of investigation and enforcement action.

In fact, ASIC’s enforcement activity has already increased substantially, with the number of investigations and new court proceedings nearly doubling in the twelve months leading up to the announcement.

As a result, lenders should anticipate that the regulator will remain highly active through 2026.

Key Lessons from the ASIC v Oak Capital Case

The legal action initiated by ASIC against Oak Capital ( Australian Securities and Investments Commission v Oak Capital Mortgage Fund Limited & Anor [2024] FCA) in late 2024 provides insight into the types of conduct the regulator is targeting.

Specifically, ASIC commenced proceedings alleging unconscionable conduct under the Australian Securities and Investments Commission Act 2001 (Cth), although it is important to note these are allegations that Oak Capital refutes.

The regulator’s case against Oak Capital included several key claims:

• The firm allegedly engaged in a business model where loans were structured through companies, but the funds were intended for the personal use of the individual guarantors.
• It was claimed that the borrowing companies were often non-trading, had no assets, or were not expected to benefit from the loan, which can increase the risk profile of the lender.
• ASIC alleged that loan approvals were primarily based on the value of the security property, with little or no consideration for the guarantor’s ability to service the loan.
• The loans were characterised by high fees and high interest rates, and borrowers were required to sign declarations stating the loan was for a business purpose.

How to Document & Retain Pre-Settlement Decisions

Building Your Evidence Pack – A Checklist for Lenders

To create a defensible record of a loan’s genuine business purpose, private lenders should compile a comprehensive evidence pack before settlement. This requires systematically gathering and verifying information that substantiates the commercial nature of the transaction.

A thorough evidence pack should include the following items:

• Detailed explanation of the loan’s purpose – the customer must clearly state in the application why credit is being sought, creating the foundation of your file.
• Verification of the business case – collect documents that confirm the stated purpose; for example, if funds are for an acquisition, ensure the contract of sale names the borrowing company rather than an individual guarantor.
• Evidence of repayment strategy – verify how the borrower intends to repay, especially for short-term facilities, by requesting contracts or other arrangements they will rely on.
• Confirmation of fund disbursement – advance loan funds directly to the company’s bank account; sending money to a guarantor’s personal account can undermine a commercial-purpose assertion.

The Importance of a Disciplined Pre-Settlement Process

Many of the most effective lender protections are put in place before any funds are advanced. A disciplined pre-settlement process ensures a reliable, contemporaneous record of the loan’s commercial rationale and the steps taken to verify it.

This process guarantees that identity checks, authority to borrow and supporting materials are clearly recorded and aligned with the transaction. These measures are not meant to create unnecessary friction for borrowers needing urgent funding; rather, their purpose is to build a coherent evidentiary record that supports all parties if the loan is later reviewed or circumstances change.

Why Pro-Forma Declarations & Certificates Are Not Enough

Lenders should not assume that simply obtaining a signed business-purpose declaration or a certificate of legal advice will provide complete protection from scrutiny. Courts often look beyond these documents to examine the true substance of a transaction.

In Jeffrey William Stubbings v Jams 2 Pty Ltd [2022] HCA 6, the High Court found that reliance on pro-forma certificates and declarations did not shield lenders from findings of unconscionable conduct. The court focused on the underlying reality of the loan, which was ultimately for personal use. Treating such documents as a ‘get out of jail free’ card therefore represents a significant mistake that heightens business risks.

Reconciling Borrower Urgency with Compliance-Grade Records

Private lenders often face the challenge of meeting a borrower’s need for urgent funding while maintaining thorough documentation.

A disciplined pre-settlement process is not designed to create unnecessary friction or delays for the borrower. Instead, its purpose is to create a reliable record that supports all parties if circumstances change or the loan is scrutinised in the future.

Establishing this evidentiary record before any funds are advanced is one of the most effective protections a lender can implement. This approach helps to lower the business risks for operating companies by creating a coherent and defensible file from the outset, which is crucial for managing the lender’s overall risk profile.

Specifically, this process ensures that vital details are clearly recorded and aligned with the transaction, including:

• The commercial rationale for the loan.
• Standard identity checks.
• The verified authority to borrow.
• Other relevant supporting materials.

Identifying Red Flags That Increase Your Risk Profile

Scrutinising Loans to Non-Trading or Asset-Poor Operating Companies

Lending to a company presents a significant red flag if it exhibits any of the following characteristics:

• It currently has no assets.
• It is not actively trading.
• It is not expected to benefit from the loan facility.

These circumstances strongly suggest that the loan’s true purpose may be for the personal use of an individual guarantor, rather than for a genuine commercial reason.

For instance, the transaction’s commercial substance is questionable if a loan is intended to finance an asset that:

• The company does not reasonably require.
• Will ultimately be held in an individual’s name.

Ultimately, such arrangements can elevate the lender’s risk profile, as they may be viewed as a deliberate attempt to circumvent consumer credit protections.

Assessing a Borrower’s True Purpose & Financial Vulnerability

Particular care should be taken when a potential customer is an individual experiencing financial distress or is desperate for finance.

This includes situations where a person is under pressure from contractual obligations to a property seller or another creditor.

Another warning sign is when a customer seeks a business loan because they are unable to obtain a consumer loan. This situation often arises due to:

• Having a poor credit history.
• An inability to meet standard serviceability assessments.

Approving credit in these circumstances may be considered predatory and can significantly increase the business risks associated with the loan.

Evaluating Asset-Based Lending & Serviceability Concerns

Approving a loan based almost exclusively on the equity available in a security property, with little or no consideration for the customer’s ability to repay, is a major indicator of potential unconscionable conduct. This practice, often referred to as asset-based lending, inherently heightens the lender’s risk profile.

Furthermore, when a lender ignores clear signs that a borrower lacks the capacity to service the loan, it suggests the transaction may not be for a legitimate business purpose.

Regulators scrutinise these arrangements closely, especially if the loan involves factors that could be seen as taking advantage of the borrower’s situation, such as:

• Charging excessively high fees.
• Applying high interest rates.

Conclusion

To create durable lending structures, private lenders must prioritise the substance of a loan’s commercial purpose over its form, particularly with ASIC’s increased focus on the sector. This requires maintaining disciplined documentation processes and being vigilant for red flags to effectively manage the risk profile of operating companies and lower business risks.

For guidance on ensuring your lending practices are defensible against regulatory scrutiny, contact our private lender and non-bank finance lawyers at GRM Law for specialised legal advice. Our team provides trusted expertise across Australia, helping private lenders and non-bank financing organisations establish compliant and effective lending structures.

Frequently Asked Questions