Intercompany Loans: How Do They Work?

Business growth requires money. Sometimes, companies fund growth from their own cash flow. But fast-growing companies usually need additional capital to achieve their potential, whether it’s to hire talent, purchase equipment or simply maintain operations until the business hits its stride and revenue climbs. They may seek private investors, who infuse capital in exchange for equity; sell stock in public markets; or obtain bank loans.

A novel option for companies with subsidiaries is intercompany loans, where separate business units within a parent organization loan money to each other. In many ways, these loans are like bank loans, but because they’re private transactions within an organization, they can offer lucrative benefits — from greater flexibility and lower costs to favorable tax implications. Despite the advantages of intercompany loans, however, they bring unique risks. They require careful planning, documentation and management to ensure adherence to legal, tax and compliance standards.

This article explains how intercompany loans work, their pros and cons and when they make the most sense. It also offers best practices for managing intercompany loans.

What Is an Intercompany Loan?

Intercompany loans are made from one business unit to another within the same organization, as long as the business units are separate legal entities. They offer a flexible, cost-effective financing option for everything from managing cash flow to funding new projects or balancing the books across subsidiaries and borders. When structured and managed properly, intercompany loans can help parent companies maximize financial resources and build greater operational flexibility.

They’re often used to finance internal investments without having to rely on external banks. What makes them particularly appealing for many companies is that they can be tailored to the specific needs of the business units involved, often with more favorable terms than companies might find externally. But intercompany loans aren’t always about moving money around: They can also be used as strategic tools for optimizing an organization’s tax position or managing currency exposure.

Key Takeaways

• Intercompany loans are made from one legally separate business unit to another within the same corporate family.
• They offer a flexible, cost-efficient alternative to other forms of capital infusion, such as private investments, bank loans or stock offerings.
• Reasons for pursuing intercompany loans include flexible cash flow and liquidity management, expansion, tax benefits and improving financial statements.
• Intercompany loans require careful documentation and planning, which includes identifying a need, setting terms, reporting and carefully monitoring factors that can affect loan terms.
• Disadvantages of intercompany loans include regulatory risk, complex reporting and potentially negative tax implications.
• To avoid obstacles, companies should carefully document loan details and terms, monitor and enforce repayment, diligently assess currency markets and review and revise agreements as necessary.

Intercompany Loans Explained

Companies often weigh the pros and cons of intercompany loans against alternatives, such as external borrowing and equity financing. Loans from banks or other financial institutions usually come with stringent credit requirements, such as asking for years of financial documentation about profitability, cash flow and debt-to-income ratios. Banks might also charge high interest rates or impose restrictive terms, like preventing the borrower from taking on debt beyond a specified limit.

Equity financing is another funding option for growing companies. Equity financing, where funds are raised by selling shares in the company, avoids interest costs and repayment obligations but dilutes existing ownership. That can shift leadership and control dynamics within the company. While third-party loan options can provide access to capital without diluting ownership, they lack the flexibility and tax optimization benefits of intercompany loans.

Intercompany loans offer a way to optimize capital without external scrutiny or regulatory hurdles, which often appeals to companies seeking more control over their financial strategies.

Reasons for Intercompany Loans

Companies pursue intercompany loans for a variety of reasons, ranging from fueling rapid growth to supporting struggling business units. Reasons for extending intercompany loans often fall into one or more of the following categories.

• Cash and liquidity management: Intercompany loans allow a corporation’s funds to flow when and where they’re needed most, without the delays or costs that may accompany external financing. For example, a parent company might extend a loan to a subsidiary that faces a short-term liquidity crunch because of a seasonal dip in sales. As a result, the subsidiary stays financially healthy and the parent company manages its overall liquidity more efficiently by using internal resources to meet temporary cash flow needs. Before making a loan for this reason, companies usually consider how else the funds might be used. After all, an intercompany loan is more efficient than a bank loan only if it saves the company more money than it could earn in potential income by investing in, for example, expansion, which is discussed next.

• Expansion and investment financing: Compared to third-party financing, intercompany loans offer a more streamlined and cost-effective way to fuel expansion and investment opportunities. A parent company could use an intercompany loan to funnel capital from a cash-rich unit to a growth-oriented subsidiary looking to enter a new market or develop a new product. Not only does an intercompany loan help the subsidiary get into the market quickly, but it also optimizes the parent’s overall tax position and reduces external borrowing costs.

• Tax efficiency: To illustrate how a multinational organization might use intercompany loans for tax optimization, consider a parent headquartered in a high-tax country that has a subsidiary in a low-tax country. The subsidiary loans $1 million to the parent at an interest rate of 5%. The parent pays $50,000 in interest to the subsidiary, which reduces the parent’s income (because the interest payment is tax-deductible); meanwhile, the subsidiary must recognize the $50,000 payment as part of its taxable income. If the parent company’s effective tax rate is 30% and the subsidiary’s is 10%, the parent enjoys tax savings of $15,000 and the subsidiary has a tax obligation of $5,000, meaning that the entire organization realizes net savings of $10,000. It’s important to note, though, that many countries have established regulations to limit the extent to which companies can use intercompany loans for tax optimization. Companies must carefully navigate these regulations to avoid potential penalties and ensure compliance with local tax laws.

• Mitigate financial and currency risks: By structuring intercompany loans in the local currency of the borrowing unit, companies can reduce exposure to foreign exchange volatility. For example, if a U.S.-based parent company lends euros to its European subsidiary, it aligns the subsidiary’s loan obligations with the subsidiary’s euro-based income streams, which protects against currency fluctuations and builds financial stability across the entire organization.

• Enhance financial ratios and statements of a subsidiary: Intercompany loans help organizations optimize the distribution of assets and liabilities across the company. By extending a loan to a subsidiary with less debt, for example, a parent company can bolster the subsidiary’s balance sheet and improve key financial ratios like debt-to-equity. Reallocating debt within the group in this way can make the subsidiary more attractive to external investors and lenders.

How Do Intercompany Loans Work?

The concept of an intercompany loan isn’t all that different from a bank loan. But, because the transaction is entirely internal, companies are on the hook for maintaining careful records to confirm loan details, payments and adherence to regulations. The following series of steps outlines the key components of intercompany loans.

1. Identifying the Need for a Loan

   Identifying the need for an intercompany loan starts with understanding each business unit’s financial health and goals. Ideal situations for intercompany loans include a subsidiary facing a temporary liquidity crunch or needing investment for growth. Intercompany loans are also a good way to manage foreign exchange risks. For example, if a subsidiary wants to expand but doesn’t have the cash, a loan from a cash-rich unit in another part of the organization can quickly infuse capital without the high costs or restrictive terms of external options. Companies should regularly review cash flows, investment plans and overall financial strategies to understand exactly where internal financing can support overall objectives more effectively than external options.

2. Setting Terms and Conditions

   Terms and conditions for an intercompany loan provide critical clarity within an organization. Terms include interest rates, repayment schedules and any stipulations tied to the loan. For example, a company might structure a loan with a low interest rate to a subsidiary in high-growth mode, offering flexible repayment terms that help the subsidiary meet its cash flow needs. The terms should align with market conditions, as if the loan were with an external party, to satisfy standards for tax purposes — known as arm’s length terms. In addition, be sure to formally document loan agreements, just as bank loans would entail, to avoid legal or tax complications.

3. Approval and Disbursement

   Approval and disbursement processes are meant to guarantee that loans are granted and received according to company policies and regulatory requirements. In the approval process, finance and legal departments typically review and authorize the loan terms to be sure they align with company objectives and compliance standards. After approval, the disbursement process involves the actual transfer of funds from one company to the other; it usually includes formal documentation to record the transaction. Creating a standard approval workflow and documentation template can streamline the process and improve decision-making, while also making tracking and compliance easier.

4. Accounting and Reporting

   Recording a loan’s details in the financial statements of both the borrower and the lender, including the amount, interest rate, repayment terms and any currency exchange implications, is an essential step in the intercompany accounting process. When a parent company lends money to a subsidiary, for example, the transaction needs to be reflected as a receivable in the parent’s books and a payable in the subsidiary’s. This is necessary in order to follow established accounting principles in the International Financial Reporting Standards or Generally Accepted Accounting Principles. Another important step is reconciling intercompany accounts to catch and correct any discrepancies quickly, so loan records accurately reflect terms and status.

5. Repayment and Monitoring

   The repayment and monitoring process involves setting a clear repayment schedule, including interest payments, and regularly reviewing a loan’s status to maintain compliance. Financial software can help companies track payments by recording transactions accurately and identifying any discrepancies quickly. Periodic audits of a loan help verify that its terms are being met, and they provide an opportunity to reassess the loan’s performance against the organization’s strategic financial goals.

6. Adjustments and Modifications

   Sometimes, companies need to adapt the terms of an existing intercompany loan to address shifting financial situations, regulatory requirements or strategic objectives. For example, if a subsidiary faces unexpected economic headwinds, loan terms can be adjusted to extend the repayment period or alter the interest rate. Such changes require clear communication and documentation in formal amendments to the original loan agreement. A helpful tip: Include flexible terms in the original agreement to allow for certain adjustments without requiring a full renegotiation. It can save time and promote agility.

7. Completion

   The completion process officially ends the loan agreement by confirming that all parties have fulfilled their obligations and that all financial records accurately reflect the transaction. This includes attesting to the full repayment of the principal and any outstanding interest, sending a formal loan closure statement and adjusting financial accounts to remove the loan from balance sheets. It’s also wise to do a post-completion review to evaluate the loan’s impact on overall financial health and the efficiency of the company’s intercompany loan process. This review can provide valuable nuggets of information for future intercompany transactions.

Intercompany Loans vs. Intercompany Capital Contributions

At this point, a smart reader might wonder why a parent company doesn’t simply transfer money to the subsidiary that needs it, rather than go through the complex process needed for an intercompany loan. It’s a fair question — but there isn’t anything simple about such a transfer, either. It would be considered a capital contribution, rather than a loan, and there are distinct pros and cons for each option. Intercompany loans, for example, offer financial flexibility and the potential for interest income for the lender. But they also require careful management to maintain compliance with regulations pertaining to the pricing of transactions between affiliated units in a multinational corporation — known as transfer pricing laws.

A capital contribution, on the other hand, strengthens the recipient’s balance sheet by increasing its equity balance, which may improve its borrowing capacity from external sources. Unlike intercompany loans, however, capital contributions don’t generate direct income for the contributing entity and can dilute ownership percentages, which might affect control and dividend distributions.

Another difference is overall complexity. Intercompany loans offer tax advantages through deductible interest expenses and income, all of which require research, compliance and meticulous recordkeeping. Capital contributions are simpler in this regard because they don’t require ongoing management or compliance with interest rate benchmarks.

Which method makes the most sense depends on a company’s needs for flexibility and tax optimization, as well as the subsidiary’s financial health. In general, it’s often a question of short-term versus long-term financial needs and strategic goals, plus the tax implications and regulatory requirements in different regions. Loans offer a temporary cash infusion with repayment expectations, while capital contributions are a permanent investment intended to strengthen the receiver’s equity.

Advantages of Intercompany Loans

External financing options may be able to provide companies with an important capital infusion, but intercompany loans offer benefits that go beyond the company receiving the funds. Both parent and subsidiary companies can benefit from intercompany loans, in the following ways.

• Cost and efficiency: Intercompany loans allow companies to quickly transfer funds within the overall organization at lower interest rates and with fewer formalities than external financing options confer. For example, a parent company can lend to a subsidiary without the need for external credit checks, which can significantly reduce transaction costs and streamline the entire funding process.

• Flexibility and quick access: As mentioned above, intercompany loans allow connected business units to get quick access to financing without having to deal with the lengthy approval processes required by external lenders. A subsidiary facing unexpected cash flow shortages, for example, can get funding from its parent company almost immediately to keep operations moving smoothly without external-borrowing delays.

• Tax optimization: Tax benefits are often viewed as one of the key benefits of intercompany loans because they allow funds to move within an organization in a way that can maximize interest deductions and the strategic allocation of profits. As explained above, however, many tax jurisdictions have regulations designed to limit tax-lowering opportunities from intercompany loans. The bottom line is this: Tax optimization is a multilayered, tricky discipline. So, while it’s helpful to be aware of, it’s best to consult an international tax expert if actually doing it.

• Risk management: By keeping financing options within a parent organization, companies can mitigate the risk of unexpected shifts in external market conditions and credit availability. For example, a subsidiary with sudden operational challenges can bypass the need for external credit approval and quickly address financial risks by securing a loan from its parent company. Also, as mentioned above, intercompany loans can be used to hedge against the risk of currency exchange-rate volatility.

• Strategic support: Intercompany loans provide flexible and targeted funding solutions that can quickly address a parent company’s broader goals and challenges. For example, a company can funnel money to a subsidiary in need of urgent expansion capital, directly supporting a broader strategic initiative without the delay or complexity of external financing options.

Disadvantages of Intercompany Loans

The benefits of intercompany loans are attractive for many companies. But there also are reasons to tread carefully, particularly because of the amount of oversight required and the need to adjust loans when market conditions shift. The following list outlines several important caveats to consider before transacting an intercompany loan.

• Regulatory and tax compliance risks: One drawback of intercompany loans involves navigating often complex — and potentially costly — regulatory and tax compliance requirements, which can vary considerably by region. For example, loans that aren’t structured at arm’s length terms can draw scrutiny and adjustments from tax authorities, resulting in unexpected tax bills. This is particularly true for U.S. parent companies, which have dealt with steadily increasing interest rates in recent years that must be reflected in updated intercompany loan interest rates. Companies should carefully document loan terms to confirm that they meet market conditions. In addition, consult with tax and legal experts to comply with all relevant regulations and transfer pricing guidelines.

• Financial reporting complexity: Intercompany loans require meticulous documentation and reconciliation to verify accurate transactions and eliminate double-counting across entities in financial reporting. To maintain clarity and compliance with accounting standards, for example, a loan from a parent company to a subsidiary must be recorded as both an asset and a liability. Managing this complexity requires exhaustive internal financial controls. That’s why companies often use specialized accounting software to handle intercompany transactions.

• Risk of intercompany conflict: Conflict can arise when subsidiaries of the same parent company disagree about the terms and conditions of intercompany loans, such as repayment schedules or interest rates. The resulting corporate tension can interfere with overall collaboration and efficiency. That’s why it’s important to establish clear, transparent policies — and perhaps an impartial internal body — to oversee intercompany agreements. This can help ensure that all intercompany transactions are conducted fairly and remain in line with strategic objectives.

• Potential for negative tax implications: If intercompany loans aren’t structured according to transfer pricing laws, there can be negative tax implications that result in hefty fines and adjustments from tax authorities. For example, if a loan’s interest rate doesn’t align with market rates, it may be reclassified as a dividend, which carries a different tax treatment. Companies should use in-depth internal oversight to make sure their intercompany loan terms are at arm’s length, are carefully documented and are reviewed regularly by tax professionals to be sure they align with current laws and market conditions.

Accounting and Taxation for Intercompany Loans

Intercompany loans present unique accounting and taxation scenarios because they need to meet arm’s length standards to avoid reclassification by tax authorities and the potential tax liabilities such reclassifications can bring. This means interest rates and terms for intercompany loans must mirror those found in the open market for unrelated organizations. Open markets, of course, have ranges, and coming in at the lowest end of an interest rate range can make for sizable savings when large principal amounts are involved. But, if an intercompany loan interest rate is set too low, tax authorities could view it as a disguised form of capital injection, which would then require a tax adjustment and potentially higher liability.

On the accounting front, intercompany loans require careful matching of credits and debits across entities to prevent double-counting and to maintain accurate consolidation. Companies should maintain detailed documentation, conduct regular transfer pricing studies to comply with current market conditions and seek advice from tax professionals to validate their practices.

9 Tips for Managing Intercompany Loans

Intercompany accounting is always tricky. To get the potential benefits of intercompany loans, without adding to the complexity of intercompany accounting, companies must document and manage loan details carefully. These nine tips can help you prepare and oversee loans properly to avoid potentially costly errors in reporting and compliance.

1. Formalize Loan Agreements

   Intercompany loans require detailed documentation of terms that outline the amount, interest rate, repayment schedule and any specific stipulations. Putting those terms on paper provides a compass for both parties and helps maintain clarity, particularly in the event of any disputes or audits. It’s essential that the loan agreement comply with both internal corporate policies and external regulatory requirements, such as transfer pricing rules and tax laws. To ensure that the agreement meets these criteria, build cross-functional teams from legal, tax and finance departments early in the drafting process to make sure all angles are covered. If possible, anticipate any potential future changes in the business or economic climate by including flexible terms that allow for adjustments to the loan without the need for a completely new agreement.

2. Ensure Arm’s Length Compliance

   Arm’s length compliance guarantees that intercompany loan terms will mirror those offered in the open market and meet global tax regulations. It also prevents profit shifting, a process where companies intentionally structure transactions to move profits from high-tax areas to low-tax areas. It’s not inherently illegal, but only if it’s not used to deliberately evade taxes or manipulate profits. To maintain arm’s length compliance, benchmark loan terms against comparable market transactions, document the rationale for interest rates, and regularly review and adjust agreements in response to changing market conditions. Managing disparate interpretations of market comparability and evolving tax laws can be challenging, so consider seeking expert financial and legal advice.

3. Maintain Accurate and Timely Records

   Intercompany loans require transparency to facilitate smooth audits and comply with tax regulations. That’s why it’s important to adopt a systematic approach to documentation that captures all loan details, including any changes to the terms. Challenges can arise when the records of the lending and borrowing entities don’t match. Using a centralized accounting system for real-time updates and reconciliation can reduce the risk. Regular reviews of the loan agreements and strict internal controls also help. Finance systems that use innovations like blockchain technology can improve ledger management by providing an irrefutable record of all transactions to maintain loan integrity and traceability.

4. Monitor and Enforce Repayment Terms

   If companies don’t carefully monitor and enforce repayment terms for intercompany loans, it can lead to discrepancies in financial reporting, tax complications and potentially harm the relationship between business units. A key step in monitoring and enforcing repayment terms is establishing clear protocols for regular reviews of payment schedules. It’s also important to maintain open lines of communication between entities and to use automated tracking systems for payment reminders and alerts. Managing loans across different jurisdictions with varied tax implications and regulatory requirements can make compliance challenging. The risk can be mitigated using a centralized finance software function that oversees intercompany transactions and can maintain consistency across the group.

5. Understand Tax Implications

   Without a full understanding of intercompany loans’ tax implications, companies risk fines, audits and reputational damage from noncompliance. Companies should conduct regular transfer pricing studies, consult with tax professionals and be aware of changes in tax legislation in all regions. Staying on top of complex tax laws and reforms across different countries poses a challenge, however. Consider establishing a dedicated tax compliance team and leveraging technology for tracking and analysis to overcome any obstacles. In addition, be sure to consider the impact of currency fluctuations on tax obligations. Changes in exchange rates can affect the value of loan repayments and, in turn, the taxable income of the entities involved.

6. Manage Currency and Country Risk

   Fluctuating exchange rates can significantly impact loan repayment amounts. In addition, geopolitical instability can not only cause currency fluctuations but also lead to regulatory changes and disruptions in repayment capabilities that can impact the financial stability of the entities involved in an intercompany loan. The result can be unexpected financial losses or unfair tax advantages, which can lead to regulatory scrutiny. Forward contracts can help hedge against currency fluctuations by locking in exchange rates for future transactions. Companies also should consider loan currencies that align with the operating currencies of the borrowing entity, in addition to conducting thorough country risk assessments before issuing loans. Staying informed about global economic trends, leveraging financial instruments for hedging purposes and consulting with experts in international finance can help manage the volatility of foreign exchange markets and the complexity of varying regulatory environments across countries. Also, to avoid concentrating too much risk in one country’s currency, regularly review and adjust the currency mix of intercompany loans, in response to changes in the global economic landscape, and diversify the geographic/currency distribution of loans.

7. Regularly Reconcile Intercompany Accounts

   Reconciling intercompany accounts builds accuracy in financial reporting by identifying discrepancies early. It also maintains compliance with tax laws and accounting standards. It’s important for companies to set a regular reconciliation schedule and use accounting software that can track and automatically net intercompany transactions in real time. In addition, all entries should be supported by appropriate documentation. Companies will need to manage accounting practices across subsidiaries, as well as time zone differences. Consider standardizing accounting procedures and leveraging cloud-based software for synchronized updates. A neutral third-party auditor that periodically reviews intercompany transactions can provide an objective assessment and help identify areas for improvement in the reconciliation process.

8. Review Regularly and Adjust Terms as Needed

   Intercompany loans must align with changing market conditions, regulatory environments and the evolving financial needs of each entity within a parent company. If companies don’t regularly review and adjust loan terms, they risk noncompliance with tax laws, as well as poor capital allocation and potential financial imbalances that could jeopardize the company’s overall financial strength. To manage the review process, establish a routine review schedule, monitor external economic indicators and tax law changes, and maintain open communication among business units. This helps to ensure that any necessary adjustments are timely. Given shifting international regulations and sometimes conflicting priorities among business units, it’s a good idea to establish a dedicated, cross-functional loan management team comprised of finance, legal and tax experts. In addition, advanced analytics and financial modeling can predict future conditions and their potential impact on loan terms, resulting in more proactive adjustments.

9. Use a Financial Management System

   Financial management systems can streamline the intercompany loan process, while achieving greater accuracy and compliance and the ability to track transactions and balances across different business units. To choose the right system, companies should assess their specific needs, including the volume of transactions, reporting capabilities and compliance features. Also, consider scalable systems that can integrate with existing technology stacks. It’s important to find a balance between functionality and cost, as well as selecting a user-friendly system for employees. To find the right solution, use meticulous market research and seek recommendations from industry peers. In addition, look for customizable solutions that can be tailored to specific requirements. Systems with advanced analytics and forecasting tools can also provide valuable insights for stronger decision-making regarding future intercompany loan planning.

Example of Intercompany Loans

Let’s take a closer look at an example of an intercompany loan and compare it to other external financing options. Say a U.S.-based parent company has a subsidiary in India that needs funds to expand manufacturing operations. The parent company extends an intercompany loan to the subsidiary at an interest rate slightly lower than what the subsidiary would get from local banks but high enough to comply with U.S. and Indian transfer pricing regulations and avoid creating a taxable benefit in India. The loan is structured over five years to allow the subsidiary to repay the amount with interest in a timeframe that suits its projected cash flows from the expansion.

If the subsidiary used external financing, it might encounter higher interest rates, stricter collateral requirements and a more complex due diligence process. External loans also might not offer the same flexibility in terms of currency denomination, which is essential for managing foreign exchange risk. Intercompany loans can be structured in either the parent’s or the subsidiary’s local currency, depending on which strategy best minimizes overall currency exposure. In this example, an intercompany loan not only saves on financing costs but also helps refine cash management and boost tax efficiency.

Make Intercompany Loan Management Easier With NetSuite

NetSuite’s integrated financial management suite offers real-time visibility and streamlined processes for handling loans across multinational entities. NetSuite’s OneWorld global business management solution facilitates multicurrency management and financial statement consolidation. But it also offers automated intercompany consolidation to handle exchange rate fluctuations efficiently, simplify reconciliation processes and oversee compliance with global accounting standards. For example, OneWorld automatically generates intercompany loan statements and reconciles balances in real time to reduce manual effort and the potential for errors.

NetSuite’s financial management solutions seamlessly integrate with its overall enterprise resource planning (ERP) system, which also includes modules for customer relationship management, human resources, ecommerce and inventory management, among others. NetSuite’s cloud-native architecture offers scalability, access from anywhere and comprehensive analytics to drive better decision-making.

When planned and managed carefully, intercompany loans offer parent companies and their subsidiaries significant advantages over other alternatives for raising capital. But don’t be fooled: Just because intercompany loans are internal transactions doesn’t mean external authorities won’t scrutinize them. Intercompany loans require careful planning and oversight. The above tips can help avoid common pitfalls and ensure that the loan achieves its goals.

Intercompany Loan FAQs

Are intercompany loans considered debt?

Yes. Intercompany loans represent borrowed money that one business unit within a multinational organization owes to another unit in the same group. They’re recorded as liabilities (debt) on the borrower’s balance sheet and as assets on the lender’s balance sheet. Despite being internal transactions, they must be managed and documented with the same rigor as external debt to ensure compliance with legal and tax rules.

Is an intercompany loan a liability?

Yes, an intercompany loan is a liability for the borrowing entity within the parent organization, representing that company’s responsibility to repay the borrowed funds. The loan is also recorded as an asset on the lending company’s balance sheet, which documents the expectation to receive repayment.

What are the risks of intercompany loans?

The are several risks associated with intercompany loans. They can create tax compliance issues, if they’re not properly documented or if they fail to meet arm’s length principles. This can lead to potential tax penalties. Currency fluctuations can also impact the value of repayments for loans across borders. In addition, mismanaged loans can lead to cash flow imbalances within the parent organization.

What is an example of intercompany debt?

One example of intercompany debt is a parent company extending an intercompany loan to its subsidiary to finance its operations or growth needs. The loan is recorded as an asset on the parent company’s balance sheet and as a liability on the subsidiary’s balance sheet. Both companies agree to the terms of the loan, such as the interest rate and repayment schedule.

What are the benefits of intercompany loans?

A primary benefit of intercompany loans is flexibility in funding and cash management within a parent organization, which makes the allocation of resources across entities more efficient. Intercompany loans can also reduce external borrowing costs, while helping companies make the most of tax liabilities. In addition, they offer a way to support cash-strapped subsidiaries without having to turn to external financial markets. Finally, they can aid in managing foreign exchange risks and liquidity within a company, if planned properly.