Financial Modelling For Leveraged Buyouts (LBOs)
Just like mergers and acquisitions, modeling for leveraged buyouts (LBOs) also requires special skill and knowledge. In this article, we will have a closer look at how leveraged buyouts work as well as how financial modeling techniques need to be adopted to meet the needs of investors indulging in LBO’s. What is a Leveraged Buyout? […]
Veto Rights – Meaning and its Importance
The process of negotiations between startup companies and investors is often hotly debated and contested. There are several points of contention between the two parties. However, the two parties are often able to reconcile most of their differences. However, when it comes to controlling of the startup firm, both the startup founders as well as […]
Strategies Used by American Companies for Tax Avoidance
America has been the hub of financial and entrepreneurial activity ever since the end of World War 2. However, over the past few years, the number of corporations that are using America as their base has been steadily declining. This is because of the unfavorable tax policies in America. America is the only country in […]
Procedure of Job Order Costing
Before the Job The first four stages are done before the job is being performed. The final purpose of this is to give a quotation to the clients. The calculation is done based on very little information. However, it needs to be precise. Here is the procedure: Stage 1: List the Cost Objects At the […]
Asset Reconstruction Companies
The Indian banking system is reeling under a glut of Non Performing Assets (NPA’s). The unpaid debts of Indian corporations and households have risen to alarming levels. High level bureaucratic meetings are being held to get rid of this menace. Nonperforming assets could appear on the balance sheet of banks. This could cause a ripple […]
Liquidity management can be a big problem for several companies. This is particularly true if the company has a large number of subsidiaries that are scattered in different places around the world.
Companies that grow via the mergers and acquisitions route tend to face this problem more than other companies. This is because they often have a lot of subsidiaries, the business of which is not tightly integrated with one another.
Over the years, companies have come to the realization that it is quite expensive for individual companies to borrow from the external market.
Also, it does not make any sense for one subsidiary company to borrow money from the market at a higher rate of interest while another subsidiary of the same company is depositing money at a lower rate.
Hence, a system needs to be created wherein one subsidiary of the company can make a loan to the other and both companies are better off in the end.
The borrowing company would have to pay a lesser rate of interest while at the same time the lending company would receive a higher yield creating a win-win situation.
Facilitating intercompany loans as well as accounting for them can be an incredibly complex process. This is because of the fact that it is possible for several regulatory and tax authorities to also be involved in the process.
Commercial banks typically help their clients simplify and automate their intercompany loans process.
In this article, we will have a closer look at how commercial banks are able to add value in the process.
Intercompany loans can help the company drastically reduce the cost of financing. Since the funds are accrued from different subsidiaries within the same company, processing, loan origination and other financing charges do not have to be paid.
Also, there are certain charges associated with borrowing any kind of money from the market. These charges too can be avoided.
Intercompany loans help the company utilize its cash flow to the maximum. It enables the optimum use of cash flow throughout the company.
Intercompany loans can be of two major types depending upon the cash flow arrangement between the companies. The two types have been explained below:
Instead, every subsidiary deals with the parent company. Many companies like this approach since it removes the counterparty risk for the subsidiaries involved.
When subsidiaries of companies make intercompany loans to each other, they face several problems. Some of the important ones have been listed below:
Hence, they are not sure whether intercompany loans will suffice or whether external funding needs to be sought
Commercial banks across the world have realized this problem and have come up with various solutions to make the intercompany loan process better. Some of the steps taken by commercial banks are as follows:
Banks study the financials of each subsidiary and prescribe a credit limit up to which funds can be easily disbursed at the mere click of a button. Hence, subsidiaries get timely access to funds which makes intercompany lending more viable
Since banks often have a connection with the ERP system of their corporate partner, such entries are posted into the accounting books of the corporation with a high degree of accuracy and minimal supervision.
The intercompany loan process had two major drawbacks viz. it was slow and it was complicated. Commercial banks have created software systems that can help eliminate these problems.
It is now possible for subsidiaries to obtain intercompany loans almost instantaneously and the recording and reconciliation have also been largely simplified.
Hence, it can be said that commercial banks have become key players in the intercompany lending process.
The fact of the matter is that commercial banks have realized that companies do not always want to borrow from them.
Sometimes, they want to make more efficient use of their own cash flow.
Commercial banks are enabling corporations to do so and have started earning revenue in the form of transaction fees during the process.
Your email address will not be published. Required fields are marked *
