Intragroup Loans and What Lenders Make of Them
Nearly every group that has grown across more than one country carries debt inside itself. A parent company funded a subsidiary’s purchase because that was faster than arranging a bank loan. A shareholder lent money instead of injecting capital because a loan can come back out without formality. One operating company covered another’s shortfall in a difficult quarter and the balance was never settled. None of it was designed as a financing structure. Almost all of it ended up booked as one.
Inside the group these positions feel like housekeeping. To a lender reading the accounts they are something else entirely: claims on the borrower held by parties the lender cannot see clearly, ranking somewhere unstated, repayable at some unstated moment, on terms that may not be written down anywhere. How a lender reads that debt, and what order the credit file puts on it before the lender has to ask, decides more financing outcomes than most borrowers suspect.
Where the debt inside a group comes from
Intragroup debt is rarely the product of a strategy. It accumulates. A holding company collects rent or dividends in one country and lends the money onward to fund growth in another. A parent advances the deposit for an acquisition because the bank process would have missed the deadline. Shareholders fund the business through loans rather than capital increases because a loan avoids notarial formality and can be repaid when convenient. Each movement solved the problem of the week it happened in, and each left a balance behind.
Centralised treasury deepens the layer. In groups that pool cash, balances build between entities continuously, and nobody treats them as loans in any meaningful sense. Interest is sometimes booked and sometimes not. Repayment dates rarely exist. Where a written agreement exists at all, it was often drafted years ago, for a different amount, and never updated as the balance moved.
By the time such a group approaches a lender, the intragroup positions have usually reached a state that management itself cannot explain quickly. Who owes what to whom, since when, on what terms, at what rate, and for what original purpose. In the group’s daily life the answers never mattered, because the money never left the family. In a credit process they matter immediately, because from the outside every one of those balances is a claim against the company that is asking to borrow.
None of this makes intragroup lending a mistake. It is often the cheapest and fastest way to move funding to the entity that needs it, and lenders know that perfectly well. The problem is almost never that the debt exists. The problem is the condition it is in when a third party has to read it.
The first question: is it debt at all
A credit committee looking at intragroup balances starts from one distinction: is this genuine debt, or is it shareholder money wearing a loan agreement? The distinction is not academic. Genuine debt expects to be serviced and repaid, and its repayments will compete with the lender’s own. Money that behaves like capital, sitting for years without interest paid, without a schedule and without any real expectation of return, competes with nothing.
Most intragroup debt sits somewhere between the two, and the accounts do not say where. A shareholder loan with no maturity and no interest actually paid looks like equity in practice and like debt on paper. The lender cannot rely on practice, because practice can change the day after completion. What is written is a claim, and unless something in the file resolves the ambiguity, the committee resolves it the cautious way.
The cautious way is worth spelling out, because it is the standard outcome of an unexplained file. The intragroup loan is counted as debt when the committee measures leverage, which makes the group look more indebted than its owners consider it to be. At the same time it earns no credit as committed capital, because nothing prevents it from being repaid to the shareholder shortly after the external loan is drawn. The position weighs on the analysis twice, once as a liability and once as a flight risk, and the borrower pays for both readings. A file that establishes the true nature of each balance, and evidences it, is not doing anything sophisticated. It is refusing to pay twice for the same money.
The second question: where the cash can go
The lender’s deeper concern is movement. External debt is serviced with cash, and cash inside a group travels along the intragroup positions. If the operating company that generates the money owes its parent, then repaying that loan is a route by which cash leaves the borrower before the lender is paid. Seen from the lender’s side of the table, every intragroup balance is a potential leak in the vessel it is being asked to fill.
This is why lenders ask questions that strike borrowers as intrusive. Can the shareholder loan be called on demand. Has the parent historically swept cash up from this entity, and under what obligation. Is there anything that stops the group from deciding, in a hard year, that the internal creditor gets paid first. The honest answer in most groups is that nothing stops it except the owners’ good sense, and good sense is not a covenant.
The standard resolution is subordination. The intragroup and shareholder claims are placed contractually behind the external lender: not repaid while the external debt is outstanding, or repaid only out of defined surplus once the lender has been serviced. For most groups this costs nothing in practice, because the internal balances were never going to be called anyway. Offered early, in the file, it removes an entire category of objection before it is raised. Extracted late, after the committee has found the positions on its own, it arrives as a condition, usually accompanied by others.
Some facilities go further and restrict new intragroup lending or upstream payments while the debt runs. A borrower who has mapped its own internal flows can negotiate those restrictions so that they bind what should be bound and leave normal operations alone. A borrower who has not mapped them signs a standard clause and discovers its reach later, usually at the worst possible moment.
The order the file imposes
The work that changes the outcome happens before any lender is approached. Every intragroup position is identified and reconciled, so that both entities book the same balance and the file can state its history: original purpose, movements, current amount. Terms are put in writing where they never were, with interest, maturity and currency stated, so that the word loan on the balance sheet corresponds to a document someone can actually read.
Positions that no longer serve a purpose are cleaned up rather than explained. Trivial balances are repaid or set off. Chains of small loans between sister companies are collapsed into one documented position. Shareholder loans that are in substance permanent capital can be capitalised, which changes the ratios a lender computes and removes the ambiguity in one step. This is not cosmetic work. It is the difference between a group that manages its internal balance sheet and one that merely carries it.
Currency deserves its own line in the mapping, because cross-border groups lend to themselves across currencies without noticing. A balance advanced in one currency and booked in another moves in value every quarter, and the movement lands somewhere in the accounts a committee will read. A file that states, per position, the currency of the claim and where the exchange difference sits answers a question most borrowers never realised their balance sheet was asking. Left unstated, the differences surface during due diligence as unexplained movements, and unexplained movements are what turn a one-round review into a three-round one.
Intragroup lending also lives under tax rules, and the file cannot pretend otherwise. The pricing of the loans, the transfer pricing position behind that pricing and the deductibility of the interest are positions a lender will meet in the accounts, and the file has to be able to explain them coherently, because a tax story and a financing story that contradict each other are exactly the kind of loose thread a committee pulls. The detailed tax analysis is not the credit file’s job, and it is not this article’s subject either: it belongs with the group’s tax advisers. What the file owes the lender is coherence, not a tax memorandum.
The mapping also needs an owner and a date. In practice the work falls between the finance function, which knows the balances, and the advisers, who know what a committee will make of them, and it takes longer than anyone budgets because the historical answers live in old emails and older heads. Starting it the week a term sheet arrives means negotiating while excavating. Starting it a quarter before any approach means the file opens with the excavation finished, which is the position every borrower assumes it will be in and few actually are.
In one financing prepared for an entrepreneur with operating companies and real estate in the Netherlands and Spain, the intragroup loans and the shareholders’ contributions were reviewed together with the transfer pricing and interest deductibility positions before any institution saw the file. The balances were going to be read in any case, and it was better that the file supplied the reading.
Debt that helps instead of hurting
None of this argues against debt inside the group. Used deliberately, it is one of the most efficient instruments a group has: it moves funding across borders without external cost, it places the obligation in the entity that can actually use the money, and it preserves flexibility that a bank facility would never allow. Lenders do not penalise intragroup debt as such. They penalise intragroup debt they cannot understand.
There is also a signal in the ledger itself, and experienced credit officers read it. A group whose internal positions are reconciled, documented and ready to be subordinated is telling the lender something about how it is run. Committees extrapolate from what they can verify to what they cannot, and the internal balance sheet is one of the few places where the group’s discipline is directly visible. A clean intragroup ledger buys credibility for every other page of the file.
The positions will be read either way. That is the point to hold on to. A lender that finds undocumented balances, unpaid interest and callable shareholder loans will not assume the benign explanation, because assuming benign explanations is not the job. The only real choice the group has is whether its internal debt is read with the file’s explanation or without it, and everything about the terms that follow depends on that choice being made early, by the borrower, rather than late, by the committee.
Montclare does not act as a lender. It structures transactions, prepares the file and coordinates financing with authorised institutions.