Group structures and lending: how funders view multi entity businesses

Why lenders look beyond the borrowing entity

When a business seeking funding is part of a group, the lender's assessment rarely stops at the individual borrowing entity's accounts. Intercompany loans, shared costs, and trading between group companies can all distort what a single entity's accounts appear to show, so lenders typically request a group structure chart and consolidated accounts alongside the individual entity's figures.

A subsidiary that looks marginal on a standalone basis might be supported by a strong parent, or conversely a subsidiary that looks strong standalone might be propping up a weaker parent through intercompany transfers. Understanding the true flow of cash and support within the group is central to an accurate credit decision.

Cross guarantees and intercompany security

Lenders funding one entity in a group often ask for a cross guarantee from other group companies, or from the holding company, extending recourse beyond the borrowing entity's own assets. This is more common where the borrowing entity has limited assets of its own but benefits from group support in practice, such as a trading subsidiary within a group that holds property centrally.

Where cross guarantees are requested, it is worth understanding exactly which entities are bound and what assets within those entities the lender could ultimately call on, since this can materially widen the exposure beyond what the borrowing entity alone would carry.

Intercompany trading and transfer pricing

Where group companies trade with each other, for example a manufacturing subsidiary selling to a group owned distribution company, lenders want to see that pricing between them is commercially reasonable rather than used to shift profit to a favourable jurisdiction or away from the borrowing entity. Unclear or inconsistent intercompany pricing is a common source of delay in due diligence for group structured borrowers.

Intercompany loans also need to be clearly documented with terms, since an undocumented or informal intercompany balance is difficult for a lender to assess and can raise questions about financial discipline within the group more broadly.

Structuring funding for the right entity

Deciding which entity within a group should actually hold the debt matters both for lender comfort and for the group's own tax and operational efficiency. Generally, the entity generating the cash flow that will service the debt, or the entity holding the asset being financed, is the natural borrower, with other group entities providing support through guarantees where needed rather than each holding separate unrelated debt.

For groups spanning more than one jurisdiction, this decision also interacts with cross border tax and withholding considerations, and specialist advice is generally worth the cost to avoid structuring a facility in a way that creates an unexpected tax drag later.

What to prepare as a group borrower

A clear group structure chart, consolidated and entity level accounts, a summary of material intercompany balances and their terms, and an explanation of which entities would provide guarantees are the core items that speed up a group lending process considerably. Presenting this proactively, rather than waiting for a lender to piece it together, generally produces a faster and better informed credit decision.