Foreign-currency business loans: lower interest can be wiped out by exchange-rate movement

A UK company can borrow in a currency other than sterling, particularly when it owns foreign assets or earns revenue in that currency. The loan can create a natural hedge and sometimes different pricing, but it also exposes the borrower to exchange-rate changes if repayment cash is generated in sterling.

A foreign-currency liability moves in sterling value

HMRC's corporate-finance manual explains that if sterling weakens, a foreign-currency borrowing becomes more expensive to repay in sterling terms; if sterling strengthens, it becomes less onerous. The principal itself therefore creates FX gains or losses in the company's accounts.

Do not compare interest rates alone. A dollar loan at a lower coupon can be much more expensive if the pound falls sharply before repayment.

Borrowing can hedge a matching foreign asset or cash flow

HMRC gives the example of borrowing in the same currency as a foreign investment to reduce net exchange exposure. A company earning regular euro revenue can similarly service euro debt without converting every payment from sterling.

Match currency because of economic cash flow, not because the foreign rate appears cheaper on the day the loan is quoted.

Stress both interest and currency movement

Model principal and interest under several exchange rates. A 15 percent adverse move on a €5 million principal can create far more cash impact than a one percentage-point saving in the coupon.

Show the board the sterling-equivalent debt at current and stressed rates, together with the foreign cash flows expected to service it.

FX differences can flow through company accounts

HMRC's August 2026 guidance says companies generally determine exchange gains and losses on loan relationships according to the relevant accounting framework, including translation of foreign-currency amounts.

Keep the original currency balance, exchange rate and sterling equivalent. Do not treat retranslation as a bank cash movement when no principal was repaid.

Currency movement can affect leverage covenants

If debt is measured in sterling for covenant purposes, a weakening pound can increase reported net debt before any additional borrowing occurs.

Review how the facility converts currencies in covenant calculations and whether the lender uses spot, average or another defined rate.

Plan refinancing and maturity in the same currency

At maturity, the company needs the foreign currency unless it refinances. A business selling the foreign asset before the loan matures can lose the natural hedge and leave a standalone currency liability.

Coordinate asset disposals, dividends from overseas subsidiaries and loan repayment so treasury does not create an unplanned open FX position.

Worked example: a UK parent borrows €10 million to fund a euro-earning subsidiary. The subsidiary's euro dividends or loan repayments can service the debt without repeated currency conversion. If the parent instead had only sterling revenue, a fall from £0.85 to £0.95 per euro would increase the sterling value of €10 million principal by £1 million.

Consider hedging only the unmatched portion. A company with €6 million of expected euro receipts against €10 million of debt has a natural hedge for part of the exposure and can use forwards or other instruments for the residual if policy requires.

Review tax and withholding on cross-border funding separately from FX. Currency matching does not automatically make the legal or tax structure efficient.

Worked example: a UK company borrows $10 million when sterling-dollar is 1.25, making the principal worth roughly £8 million. If sterling later weakens to 1.10, the same $10 million principal is worth about £9.09 million before any repayment. The company has not borrowed another dollar, yet sterling leverage has increased materially.

Use cash-flow matching at the entity level. Dollar revenue in one subsidiary does not automatically hedge dollar debt in another if legal or tax constraints prevent cash from moving between them when debt service is due.

Monitor interest-rate differentials as well as FX. A foreign loan can begin with a lower coupon but become less attractive after local benchmark rates rise or hedging costs change.

Plan for refinancing currency risk. If the company expects to refinance the foreign loan in sterling, the conversion at maturity can crystallise a large FX amount even where annual interest was comfortably serviced.

Review the loan after major changes in revenue currency. A company that originally earned most cash in euros can become overexposed if it shifts sales to sterling but leaves euro debt unchanged. Natural hedges need to be monitored, not assumed permanent.

Keep debt-service dates matched to expected foreign receipts. A company can be naturally hedged in total but still face a short-term currency gap if loan interest falls due weeks before customers normally pay.