Starting your own business can give you financial freedom and can provide for your future.
You put everything you can into the business, this includes financially. When the bank lends money so you can buy a house, the mortgage protects the banks from the borrower not being able to repay the loan.
When you invest your own money in a business, you should properly document this investment as a loan and take security over an asset in the business.
If your business suffers financial difficulties and possible insolvency, you give yourself the best chance to recover your loan and keep your business.
When a bank lends a money to an individual to buy a house, the bank takes a mortgage over the house. If the individual is unable to repay the loan, the bank can recover the unpaid portion from the sale of the house. When the bank lends money to a company, the bank takes security over the assets of the company, including businesses operated by the company. If the company is unable to repay the loan, the bank can recover the unpaid portion of the loan from the sale of the assets.
The bank doesn’t lose its money because it has security.
As a small business owner, you can put money you invest into your company in the form of a secured loan that is registered on the Personal Property Security Register (PPSR).
If the company gets into financial difficulties and cannot pay back the loan, you would be in the best position to have the loan paid back to you before the other creditors of the business. This could mean even though the business fails, you can start again or avoid bankruptcy.
The loan must be in writing, preferably in a separate security agreement and more importantly registered with the PPSR. If the security is not registered on the PPSR, your loan would be regarded as unsecured creditor, meaning a significant difference in what is recovered.
It is preferable to get this security when the loan is first made. This would include when you’re putting money into your business from personal savings, redrawing on the mortgage, a personal loan from the bank or family and friends, credit cards or superannuation. Also, money you’ve put into a company since incorporation, over a number of years, can potentially be protected.
With all the current difficulties businesses face, including effects of COVID and supply-chain issues, owners are continuing to have to put in money to stay afloat, for expenses such as equipment or stock, marketing and payroll. These amounts are often substantial. It makes it all the more important to document the loans properly and get the correct registrations, to protect your position as much as possible.
Krodok have an easy to use product that enables this to be done yourself, in lieu of engaging a lawyer to prepare a document and register on the PPSR.
A link to their website is here https://krodok.com.au/
For more information or assistance please contact Infinite Accounting Solutions on 02 9899 4730 or via the contact page at www.ias-ca.com.au