Section 5(1) of the National Credit Code, explained for SMEs

If you run a business through a Pty Ltd company and you have ever applied for a loan, you may have noticed that the process looks different depending on whether you borrow personally or through the company. The reason sits in a single provision of the National Credit Code: section 5(1). Understanding what this section actually says, and what it does not say, can change the way you think about your company's access to finance. For a broader look at how entity structure shapes the loans we arrange, see our who we help page.

What section 5(1) actually says

The National Credit Code (Schedule 1 to the National Consumer Credit Protection Act 2009) is the legislation that regulates consumer credit in Australia. It sets out responsible-lending obligations, pre-contractual disclosure requirements, hardship provisions, and a range of other consumer protections. But before any of those protections kick in, the Code defines who it applies to.

Section 5(1) provides that the Code applies to a credit contract only if, among other things, the debtor is a "natural person" or a "strata corporation." A natural person is a human being. A strata corporation is a body corporate that manages common property under strata title.

The critical implication: if the debtor is a Pty Ltd company, a corporate trustee, a partnership of companies, or any other body corporate that is not a strata corporation, the National Credit Code does not apply. Not partially, not conditionally. It simply does not apply at all.

Why this matters for Pty Ltd borrowers

When a loan falls outside the National Credit Code, the entire regulatory framework designed for consumer lending falls away. That creates practical differences that matter to business borrowers.

• —No responsible-lending assessment. A funder providing credit to a Pty Ltd company is not required to conduct the "not unsuitable" assessment mandated by the NCCP Act for consumer loans. The funder will still assess risk, but it does so on commercial terms, not through a prescriptive statutory lens.
• —No pre-contractual disclosure regime. Consumer credit contracts require specific disclosures in a mandated format before the borrower signs. Loans to body corporates are not subject to these requirements. Documentation can be negotiated and executed more quickly.
• —No statutory hardship provisions. The hardship variation regime under the Code does not apply. Any hardship-related arrangements between borrower and funder are governed by the loan contract itself.
• —No Australian Credit Licence requirement for the funder. A lender does not need to hold an ACL to provide credit to a body corporate. This is why private investors and non-bank funders can participate in this market without being licensed credit providers.

What this means in practice: faster settlement and different underwriting

These are not abstract legal distinctions. They translate directly into how quickly a loan can settle and how the funder assesses risk.

A mainstream bank providing a consumer mortgage will typically take four to eight weeks to settle. Much of that time is consumed by compliance processes designed to satisfy the responsible-lending framework. A private funder providing a commercial loan to a Pty Ltd borrower is not subject to those processes. When we arrange a loan through our panel of private lenders, settlement in five to ten business days is routine, and faster turnarounds are possible in straightforward cases.

The underwriting is also different. Rather than focusing on the borrower's personal income, serviceability ratios, and credit history (the hallmarks of consumer lending), funders in this space focus on the security property, the loan-to-value ratio, the exit strategy, and the commercial logic of the deal. If the asset is strong and the exit is clear, the funder can move.

Entity structure is the gateway

The single most important structural requirement is that the borrower must be a body corporate. If you borrow as an individual, even for investment purposes, the National Credit Code may apply and the funder needs an Australian Credit Licence. If you borrow through your Pty Ltd company, section 5(1) takes the loan outside the Code entirely.

This is why Private Credit Loans only arranges loans to entity borrowers. It is not a marketing preference. It is a structural requirement that determines whether the loan sits inside or outside the regulated consumer credit framework.

If you do not currently have a Pty Ltd company and you are considering setting one up specifically for borrowing purposes, that is a legitimate strategy, but it needs to be done properly. There are anti-avoidance provisions in the Code (specifically section 13(3)) that can override the exemption if the structure is a sham. The company needs to be a genuine operating or holding entity, not a shell created solely to circumvent consumer credit law.

The Business Purpose Declaration: belt and braces

Even though section 5(1) already takes the loan outside the Code when the borrower is a body corporate, every funder on our panel still requires a Business Purpose Declaration (BPD). This is a belt-and-braces measure. The BPD provides contemporaneous written evidence that the funds are for a genuine business or investment purpose. It protects both the borrower and the funder against any later argument that the structure was designed to avoid consumer credit regulation.

Common misconceptions

There are a few things section 5(1) does not do. It does not mean the loan is unregulated in every sense. General contract law, mortgage law, the Corporations Act, ASIC's general conduct powers, and the equitable jurisdiction of the courts all still apply. It does not mean the funder can behave unconscionably. It means, specifically, that the consumer credit framework under the NCCP Act does not govern the transaction.

It also does not mean any loan to a company is automatically unregulated. If the company is a strata corporation, the Code still applies. And if the structure is an avoidance device under section 13(3), the Code applies as if the device were not in place.

Key takeaways for SME borrowers

• —Section 5(1) of the National Credit Code exempts credit to body corporate borrowers (other than strata corporations) from the consumer credit framework.
• —This enables faster settlement, different underwriting criteria, and access to private and non-bank funders who do not hold an ACL.
• —The borrower must be a genuine entity, not a shell designed to circumvent the Code.
• —A Business Purpose Declaration is required on every deal as additional protection.

To understand more about how entity structure shapes the loans we arrange, visit our who we help page, or submit a scenario and we will let you know whether your structure qualifies.