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An intercompany loan is a financial arrangement between two or more related companies. One company, the lender, provides funds to another company, the borrower. These loans are often used to manage cash flow, finance operations, or transfer funds within a corporate group.
Complexity can vary significantly, from simple bilateral agreements to sophisticated, high-value funding structures involving security, subordination, or alignment with wider financing arrangements.
If the terms of the loan aren’t clearly documented, then there may be a presumption that the loan can be recalled immediately at any time.
Directors need to act, and show they are acting, in the best interests of the company (s172 of the Companies Act 2006). Obtaining legal advice is a good way of demonstrating this.
Get a professional to confirm that existing loan covenants or security do not restrict additional borrowing or related-party transactions.
Having professionally prepared loan and security documents will greatly reduce the risk of arguments and disputes.
Intercompany loans should be on arm’s-length terms (interest rate, repayment, security, etc.) to satisfy tax and transfer pricing rules, ensuring the transaction reflects what independent parties would agree to. We do not offer tax advice, and specialist advice on HMRC or related tax issues is strongly advised.
Minority shareholder rights and/or concerns may need to be addressed.
We find that companies enter into these arrangements for a variety of commercial and strategic reasons to expand their business or deal with restructuring, including:
Working capital management - providing liquidity to subsidiaries or affiliates without external borrowing.
Funding growth or acquisitions - financing projects, expansions, or share purchases within the group.
Cash repatriation and tax efficiency - moving funds between group entities for operational or tax reasons.
Bridging finance - offering temporary funding until external financing is arranged.
Balance sheet optimisation - managing gearing, capital structures, or regulatory ratios.
Support for distressed entities - providing financial assistance to maintain solvency within a group.
Structuring the arrangement - advising on whether a loan, equity injection, or alternative structure best meets commercial goals.
Drafting and negotiating documents - drafting or advising on loan agreements, guarantees, and security documents.
Ensuring compliance - reviewing articles of association, shareholder agreements, and corporate authority under the Companies Act 2006.
Managing risk - advising directors on duties, solvency tests, and potential conflicts of interest.
Coordinating advisers - working with tax and accounting professionals to align legal, financial, and regulatory considerations.
Implementing and registering - managing Companies House filings, charge registrations, and board documentation.
Supporting underlying transactions - advising where the loan supports wider deals such as acquisitions, reorganisations, or restructurings.
Larger or more structured loans may involve layered security (charges over assets, guarantees, or subordination), particularly where external lenders are also part of the financing mix. Lawyers may be required to align these internal loans with existing banking covenants, security packages, and intercreditor agreements.
Intra-group loan agreements are usually simpler than third-party loans but there can still be a number of complex issues to consider, including the size of the loan, jurisdiction, security, and restructuring.
Key clauses (in brief):
Parties & purpose – identify group entities and loan intent.
Principal, interest & term – clear repayment terms and arm’s-length interest rate. Standard commercial loans generally incorporate market-based rates, complex interest calculations, default interest and fixed interest payment dates. Intercompany loans often have lower rates (but must be arm's length) a simpler interest structure, may omit or have minimal default interest and more flexible payment timing. Repayment terms are usually more flexible than external loans, possibly with on-demand features and early repayment without penalties and potentially contingent repayment tied to group cash flows.
Representations and warranties - typically lighter than external loans with less emphasis on financial condition.
Fewer financial covenants - may cross-reference group facility covenants.
Events of default - usually more limited than external loans, possibly excluding insolvency-related events
Security - often unsecured and if secured, possibly via a group security structure and with structural subordination
Covenants – maintain solvency, restrictions on additional debt.
Subordination clause – if loan ranks below external debt.
Governing law & dispute resolution – clarity for enforcement.
Depending on the company’s objectives, alternatives may include:
Equity injections or capital contributions - where permanent funding is intended.
Third-party lending or bank facilities - for greater independence and external oversight.
Dividend distributions or management fees - for transferring funds within a group.
Debt novation or assignment structures - where existing obligations are restructured rather than new loans issued.
With careful structuring and legal oversight, intercompany and intragroup loans can be highly effective tools for managing corporate finance and liquidity, while ensuring compliance, governance, and protection for all parties involved.
By leveraging our expertise and experience, we can help you navigate the complexities of intercompany loans and protect your business interests.
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