The moment the loan is offered
A family member offers to lend your company $50,000 to get through a slow quarter. A co-founder says they will bridge the payroll, and you will pay them back when the next client invoice lands. Or your holding company needs to move cash into the trading entity so stock can be ordered. In each case the money is moving between people who already trust each other, and the instinct is to skip the paperwork and get on with it.
That instinct is exactly why the question of form should be settled before the funds move, not after. The decision is not really about whether you trust the lender. It is about whether both sides will remember the arrangement the same way in two years, when the business is different, the relationship has changed, and one of you needs the money back.
Your options: informal loan, loan agreement or deed
For most business loans there are three real options. The first is no documentation at all: a verbal understanding, a bank transfer, and a promise to repay. The second is a written loan agreement, which is an ordinary contract recording the amount, the interest, the repayment schedule and what happens on default. The third is a deed of loan, which contains the same commercial terms but is executed as a deed, a more formal kind of legal instrument.
The narrower question most small business owners are actually asking is when a deed is worth the extra formality over a loan agreement. The two documents look alike and cover the same ground, but they differ in three legally important ways.
First, a deed does not rely on consideration. Under the general law, a contract is only enforceable if something is given in exchange for the promise, but a deed is binding because of its form alone. That makes a deed useful where there is an argument about whether the deal was properly struck, for example a founder's loan advanced before the company was formally set up.
Second, the time limits for enforcement are longer. In New South Wales, an action on a deed can be brought within twelve years of the cause of action arising, under s 16 of the Limitation Act 1969 (NSW), whereas an ordinary contract claim must usually be brought within six. Limits vary between states and territories, but the pattern holds: a deed keeps the debt enforceable for longer.
Third, execution is more demanding. A document only counts as a deed if it is expressed to be one and executed as one, which for companies means following s 127 of the Corporations Act 2001 (Cth): signature by two directors, or a director and the company secretary, or in limited cases the sole director of a proprietary company. Signatures on a deed generally need to be witnessed, and electronic execution has its own rules. A deed signed like an ordinary contract can fail to be a deed at all.
One option deserves to be flagged as a trap: the "informal deed". A verbal promise is not a deed and will be enforced, if at all, as a contract, which brings back every argument about whether a binding agreement was ever made. Conversely, for very small, genuinely low-risk loans, a deed can be overkill. If the lender can afford to lose the money and no one's tax position is affected, the cost of the formality may exceed the risk.
Five questions that point to a deed
Who is on the other side of the loan?
The loans that cause the most trouble are the ones between people who are close to each other and to the business. When a founder, family member or friend lends money, the first ambiguity is characterisation: is this a loan, a gift, or an equity contribution? The second is the commercial detail: does interest accrue, when does repayment start, and what happens if the business fails? Everyone answers those questions confidently at the start, and differently later.
A written loan forces the awkward questions to be answered while everyone is still aligned:
- Loan or gift: whether the money must ever be repaid, and whether the lender has any ownership rights.
- Interest: whether it accrues, at what rate, and whether unpaid interest capitalises.
- Repayment timing: whether repayments start immediately or after a milestone such as a funding round.
- Failure scenario: what happens to the debt if the company becomes insolvent.
The same logic applies to loans between related entities, such as a holding company and its operating company. Money moving between entities needs to be characterised as a loan, a capital contribution, a management fee or payment for services, because that characterisation drives the accounts, the tax treatment and any future due diligence. A deed of loan records the characterisation in writing, which is particularly useful when the group later seeks investment or a buyer.
Is the loan secured against business assets?
If the lender wants the right to seize assets when the borrower defaults, a deed of loan is only part of the picture. The lender also needs a security agreement that creates a security interest over the borrower's personal property, and that interest needs to be perfected under the Personal Property Securities Act 2009 (Cth). For most business assets, perfection means registering the interest on the Personal Property Securities Register (PPSR), as set out in s 21 of that Act.
Registration is not a formality you can defer. Under s 588FL of the Corporations Act 2001 (Cth), if a company goes into liquidation or administration and a security interest over its assets was not registered in time, the interest can vest in the company, meaning the lender's security disappears and the loan becomes unsecured. For these purposes, registering within 20 business days of the security agreement coming into force is treated as timely.
The difference this makes on an insolvency is stark:
- Unsecured lender: shares with all other unsecured creditors in whatever is left in the winding up, often cents in the dollar.
- Secured lender who registered on time: has priority over later secured parties and unsecured creditors, and can enforce against the assets the security covers.
How is repayment supposed to work?
"Repay when we can" is the most expensive clause a loan can have. It is hard to enforce, easy to argue about, and it strains the relationship precisely when the business is struggling. A written loan fixes a repayment structure that matches the borrower's cash flow, such as interest-only payments for a set period, monthly repayments after a grace period, a balloon payment at the end of the term, or repayments triggered by a funding round or sale of the business.
The document should also define what counts as a default and what the lender can do about it. Common default events are missed payments, breach of other terms such as providing financial information, insolvency events and unauthorised transfers of key assets. Consequences typically include default interest, the right to demand immediate repayment, enforcement of any security and recovery of enforcement costs. Writing these down does not create conflict; it removes the need to negotiate them under pressure later.
What will the tax treatment be?
For loans to or from directors and shareholders, the tax treatment can turn on the terms of the written loan. Under Division 7A of the Income Tax Assessment Act 1936 (Cth), a private company that lends money to a shareholder or an associate can be treated as having paid an unfranked dividend on the amount of the loan. Section 109N of that Act provides an escape: the loan is not treated as a dividend if, before the company's lodgment day, the agreement is in writing, the interest rate equals or exceeds the benchmark rate for the year, and the term is within the maximum, being seven years for most loans and 25 years where the loan is secured by a registered mortgage over real property worth at least 110 per cent of the loan.
The benchmark rate is the Reserve Bank's indicator lending rate for bank variable housing loans published before the start of the income year, and it changes each year. This is why the loan document is not only a legal record: its interest rate and term determine whether a shareholder loan triggers a deemed dividend. A deed drafted to match the commercial deal, with the current benchmark rate built in, is the difference between a clean loan and an unexpected tax bill for the borrower.
Intercompany loans raise their own tax and accounting questions, including whether interest is at arm's length and whether the borrower can service and deduct it. The lender's side matters too, including whether interest received is income and whether the loan was advanced from taxed profits. These are questions for the accountant working alongside a lawyer, and the written loan is the document they both rely on.
What happens if the borrower collapses?
Every lender should ask what happens if the company becomes insolvent, because that is when loan documentation is tested. An unsecured loan ranks behind secured creditors in a winding up, and in practice unsecured lenders often recover little. But there is a sharper risk for related-party loans: the repayments themselves can be clawed back.
Under the Corporations Act 2001 (Cth), a liquidator can recover an unfair preference where an unsecured creditor received more from the company than it would have in the winding up, as defined in s 588FA. Transactions of an insolvent company are voidable if entered into within the six months before the winding up begins, uncommercial transactions within two years, and, where a related entity is a party, within four years, under s 588FE.
The practical consequence is uncomfortable: a founder who repays mum's loan in full a few months before the company fails can be ordered to pay the money back so it can be redistributed among all creditors. Documentation does not prevent clawback, but a proper written loan means the debt can at least be proved in the winding up, and the terms are clear if the liquidator scrutinises how the money moved.
Getting the call right with an Artificer Legal lawyer
None of this requires every loan in a small business to go through a lawyer, but the loans with real money, close parties or security attached deserve one conversation before the funds move. An Artificer Legal practitioner can stress-test the assumptions behind the deal, starting with whether the arrangement should be a loan at all rather than equity or a capital contribution, and what each characterisation means for the parties' rights and tax positions.
Where a deed is the right call, we draft it to fit the commercial reality, with the interest rate, term, repayment schedule, default events and security provisions that match how the business actually operates. Where security is involved, we prepare the security agreement, advise on PPSR registration timing so the interest does not vest under s 588FL, and coordinate the registration steps. We also work alongside the accountant on Division 7A, making sure the written terms satisfy s 109N so a shareholder loan does not become a deemed dividend, and we make sure execution is valid, including the s 127 requirements for company signatures and the state rules on witnessing and electronic signing.
The cost of getting this wrong is out of proportion to the cost of the documentation: a deemed dividend, a security interest that vests on liquidation, a repayment clawed back by a liquidator, or a "deed" that fails to be a deed because it was signed like an invoice.
The loan that most often goes wrong
If there is one thing to take from this, it is that the loans which go wrong are the ones between people who already trust each other. The question that takes the most effort to get right is characterisation: is this money a loan, a gift or an equity stake? A deed of loan forces that question to be answered in writing while everyone is still on the same page, and it answers the follow-up questions about interest, repayment, security and failure at the same time.
Formality is not a statement of distrust. It is a way of making sure both sides' memories of the deal are identical, the debt stays enforceable for longer than an ordinary contract, and the lender keeps the remedies they think they have, including security that survives an insolvency. Use a deed when the money is meaningful, the parties are close, the loan is secured, or the tax treatment depends on the written terms. For a small, genuinely low-risk loan between parties who can wear the loss, a simple written loan agreement may be all that is needed. And for everything in between, the conversation with a lawyer and an accountant, before the funds move, is the cheapest insurance the deal will ever get.