What Is a Business Purpose Declaration?

Key takeaways

• It states the loan is for business or investment, not personal use.
• Signing it means the consumer credit protections generally do not apply.
• It is ineffective if the lender knew, or should have known, the real purpose was personal.
• Do not sign one to get a loan approved for a personal purpose.

Why lenders ask for one

Credit provided wholly or predominantly for personal, domestic or household purposes is regulated consumer credit, which requires an Australian Credit Licence and brings responsible lending obligations, hardship provisions and prescribed disclosure. Credit for business or investment purposes generally does not.

Most private lenders operate only in the business-purpose space. The declaration is how they establish and evidence that the loan sits there, and it is why the question comes up on almost every private application.

It is not a formality invented by the lender. The declaration mechanism exists in the National Credit Code precisely so that purpose can be established, and the consequences of it flow from legislation rather than from the lender's preference.

What you are actually giving up

Signing it is consequential, and it should be a considered decision rather than one more page in the pack. Outside the consumer regime, the following generally do not apply to your loan:

That is a real transfer of risk to you. In exchange you get access to lenders and flexibility the consumer market does not offer - which for a genuine business need is often the right trade, made knowingly.

When you must not sign one

Do not sign a business purpose declaration for a loan that is actually for personal use - buying or renovating the home you live in, consolidating personal debts, a car for family use, a holiday. That is a false declaration.

Importantly, the declaration does not save a lender who knew better. The Code provides that a declaration is ineffective where the credit provider knew, or had reason to believe, that the credit was in fact for a personal, domestic or household purpose. So a lender encouraging you to sign one to get around consumer regulation is not making the problem disappear - they are creating a different one, for both of you.

The honest test is simple: could you explain the business or investment purpose to a third party, with documents? If the answer is no, the product you need is consumer credit, and applying for a private business loan will waste your time and the lender's.

If you are unsure which side of the line you sit on - a mixed-purpose loan, a property that is partly a home and partly an investment - get your own legal advice before signing. This is precisely the situation the declaration is not designed to resolve on its own.

Frequently asked questions

Can I get a private loan for personal use?

Only from a lender licensed to provide consumer credit, and most private lenders are not. If the purpose is personal, domestic or household, you need a regulated consumer credit provider - not a business purpose declaration.

What happens if I sign a declaration that is not true?

You have made a false statement, and it can affect the enforceability of arrangements and expose you to consequences. The declaration is also ineffective where the lender knew or had reason to believe the real purpose was personal, so it protects nobody.

Is investing in property a business purpose?

Investment purposes are generally treated differently from personal, domestic or household purposes, but the analysis depends on the specific facts - including whether you will live in the property. Get your own advice rather than assuming.

Related reading

• Are Private Lenders Safe and Regulated in Australia?
• What Happens If You Default on a Private Loan?
• What Private Lending Actually Costs in Australia

Sources

• National Credit Code — Australian Government
• Credit licensing guidance — ASIC