Make Your Intercompany Loan Management Easier With a Few Simple Steps

When one entity loans from another one within the same company, we are talking about intercompany loans. These loans have either been set up as a result of the requirements for managing the liquidity within the company, by legal requirements or so that the real estate-owning subsidiary's mortgage deeds can be used as security in an external loan agreement. 

Intercompany loan management is about ensuring that the correct costs are transferred to the correct entity. There can be external requirements in a loan agreement regarding the framework of the internal loan, which you need to comply with. In this article, we will provide some tips on how to make this process as smooth as possible. 

Make sure to connect the interest rate to the external debt

Historically, many internal loans have had a fixed interest rate to reduce the amount of administrative work. If the market changes, however, this would quickly result in a situation where the market interest of the external debt and the interest rate of the internal loans are vastly different. Therefore, the interest rate has to follow external agreements' interest rate terms when there are external loans and other costs connected to intercompany loans. Does this mean that the construction of internal loans will become more complicated? Not necessarily. 

The benefits of applying interest rate capitalisation

To alleviate the administrative work, we recommend constructing the agreements in a way where the interest is capitalised instead of illustrated as a payment. If the interest is capitalised, the interest payment is substituted by an increase in the debt. That way, the interest payments don't need to be attested, transferred, and accounted for every quarter. Instead, you can do the accounting between the different entities based on other liquidity requirements within the company and regulate it with the help of a decrease or increase of the loan. 

You can create a company account structure that every entity within the company takes part in. This kind of company account structure can be beneficial because it allows an entity to have a negative balance while other entities have a positive one – without that having to become a financial expense on a company level. 

Learn more about how our TMS can help you manage intercompany loans

Make sure to download the full guide to learn more about how Nordkap's Treasury Management System can help your business when dealing with intercompany loan management. Click the button to get your guide!