Permitted loans and credit support: lending group cash can breach a financing covenant

Loan agreements can restrict the borrower group from making loans or extending credit, then permit defined categories through specific exceptions and baskets. This guide explains the mechanics, evidence, failure points and controls a UK business should understand before relying on the process.

What this means in practice

Loan agreements can restrict the borrower group from making loans or extending credit, then permit defined categories through specific exceptions and baskets. The practical question is whether the company can prove the condition was satisfied at the moment the decision was made.

Permissions may cover ordinary trade credit, intercompany loans within a permitted group, employee advances, acquisition-related credit or capped general baskets. A concise checklist is useful only if it still points back to the authoritative source and current transaction evidence.

How the process works

The operating sequence should move from identification to validation, approval, external action and confirmation. For this topic, the critical mechanics are: Permissions may cover ordinary trade credit, intercompany loans within a permitted group, employee advances, acquisition-related credit or capped general baskets.

Timing should be planned backwards from the required result. Notice periods, value dates, processing windows and internal approval deadlines can make a correct action operationally late, so the workflow needs a repair margin.

The data and evidence that matter

At minimum, retain lender entity, borrower or recipient, amount, purpose, maturity, currency, existing basket usage, guarantee or security and contractual permission. If one of these elements is uncertain, the case should remain open instead of being presented as complete.

The record should distinguish internal intention from external outcome. An approved request proves what the company wanted to do; a bank acknowledgement, lender confirmation, statement entry or reconciled transaction proves what actually happened.

Where the process can fail

Treasury can move cash to a non-obligor affiliate as routine group funding and unintentionally create a restricted loan outside the permitted basket. The problem normally becomes harder and more expensive to fix as the payment, settlement, test date or financing deadline approaches.

Fragmented ownership can hide exceptions. Legal, treasury, operations and accounting may each see one part of the event, so one case owner should remain responsible until the outcome is known.

Worked example: test the mechanics

A group has a £4 million general permitted-loan basket with £3.2 million already used. A treasury centre proposes an additional £1.5 million loan to an affiliate that does not qualify for another intercompany permission. The total would exceed the basket by £700,000.

The figures are illustrative rather than universal terms. In a live case the team should replace every amount, date and threshold with current source evidence, then repeat the test before treating cash, consent or hedge coverage as available.

Governance and control design

Route material intercompany funding through a covenant check and maintain a central register of permitted-loan basket usage. Where technology permits, the rule should be enforced in workflow and any override should require explicit approval with an audit trail.

Routine review should include loans and credit support by permission, basket usage and recipient entity. Stable top-line activity can otherwise hide shrinking headroom or growing manual repair.

Training works best with the company's own examples. Staff are more likely to apply the rule correctly when they can see how one wrong date, threshold, reference or account detail changes real cash.

Ownership should survive absence and staff turnover. The procedure for permitted loans and credit support should state who acts, who reviews, where evidence is stored and how unresolved items are escalated.

Documentation should be short enough to use under pressure. A one-page operating checklist can point staff directly to lender entity, borrower or recipient, amount, purpose, maturity, currency, existing basket usage, guarantee or security and contractual permission while the fuller policy keeps the legal, technical or product background.

Periodic review should compare the documented procedure with what staff actually do. Where practice has drifted, management should deliberately update the policy or restore the intended control rather than accept an undocumented compromise.

A tested fallback is part of the control. The team should know which pieces of lender entity, borrower or recipient, amount, purpose, maturity, currency, existing basket usage, guarantee or security and contractual permission are essential to act safely if the preferred system, approver or communication channel is unavailable.

Before the following reporting cycle, the owner should refresh lender entity, borrower or recipient, amount, purpose, maturity, currency, existing basket usage, guarantee or security and contractual permission and compare it with the latest external status. This prevents an unresolved exception from disappearing simply because the month or quarter has closed.