Advising on intercompany loans

In the current difficult and expensive economic environment, borrowing from commercial lenders at high interest rates with potentially onerous covenants is something that our clients are increasingly wary of. A solution to this issue, which also often has the benefit of speed and reduced costs, can sometimes be found where you already have a group company structure, with an intercompany loan.

Some businesses move funds informally between different companies within the Group, often without considering the potential tax implications and risks. A better approach will generally be to consider all aspects of any potential intercompany loan and this is where we can help, with our corporate law and tax specialisms.

Potential reasons to consider an intercompany loan

We find that clients consider a group company loan for reasons including :-

• Short to medium term cashflow needs between different group businesses
• A strategic change in thinking about the prospects of one part of the Group
• For the purpose of an acquisition which is best aligned with one company within the Group

Structuring and documenting the loan

There may be tax and other reasons, including potential concerns about future insolvency, where it is important to ensure that the loan is on an “arm’s length” basis and that appropriate consideration has been given to treating the loan on a commercial basis.

This may not require the loan to be on terms, financial or otherwise, that are identical to those available from an external commercial lender, but it will typically include :-

• A proper degree of due diligence prior to the loan.
• The terms of the loan including payment of interest and repayment terms.
• Documenting the underlying purpose for the loan.
• Ensuring that a professionally drafted loan agreement is in place which includes warranties, covenants and clauses which can include a non-subordination clause

Solicitors for intercompany loan agreements

As a niche corporate specialist, we are an ideal choice for clients looking for flexible, proactive and proportionate legal advice and services from genuine specialists. This makes us an ideal choice for intercompany loan work, where clients will generally want all the above attributes. Please do get in contact to discuss how we can assist.