A loan that is extended within a parent (corporate group) from one business unit (or subsidiary) to another. The business units or subsidiaries are, by nature, separate legal entities.

Companies with subsidiaries have this type of internal loans provided as private transaction within. In many ways, these loans have similarities with bank loans, given their very nature as sources of liquidity. But the benefits may be comparably wider, considering the greater flexibility and lower costs of funding. In other words, as a flexible, cost-effective financing option, an intercompany loan helps parent companies manage internal cash flows and direct funds to new projects, while maximizing financial resources and have potential for more operational flexibility.

A company’s ability to rely on intercompany loans implies that it can dispense with dependence on external sources of funds (such as bank loans). Furthermore, in accounting for the specific needs of the business units involved, more favorable terms in terms of loan request, amount and repayment schedules can be secured. As expected, loans from banks or other financial institutions usually carry inflexible credit requirements, such as profitability history, cash flow and debt-to-income ratios. Banks usually charge high interest rates or impose restrictive terms (e.g., preventing the borrower from taking on debt beyond a specified limit).

Intercompany loans offer a way to optimize and better control capital and financial resources without submission to regulatory hurdles and borrowing conditions imposed by others. As such, companies can have more control over their financial strategies and funding requirements.

In addition to being a source of internal funding, intercompany loans can also be used as a means by which a company can optimize its tax position or manage certain currency exposures.

In accounting, intercompany loans belong to the broader category of intercompany amounts, including intercompany debt, payables, and receivables as well as amounts previously recorded as “due to” or “due from” affiliates.