Internal and External Financing of a Company
Depending on the company's strategic objectives (acquisitions, significant investments) and the cash needs identified within its subsidiaries, Treasury must establish financing arrangements.
Internal financing involves loans contracted between two companies within the same group. These financings are generally governed by a cash management agreement, which determines the framework within which the financings are carried out, as well as the applicable interest rate conditions, particularly in light of tax constraints (arm’s length principle). This document also outlines the cash pooling mechanism, which centralizes cash to maximize invested amounts. In an environment of very low, or even negative, interest rates, and if these negative rates are not applied to the current account balance, cash pooling then loses much of its advantages.
Additionally, based on the contributions of different entities within the group, a mechanism for internal cost recharging may be implemented (intra-group invoices).
External financings can vary in complexity depending on their nature. This can range from a conventional loan with a single bank to a structured loan with a group of banks (referred to as a banking pool).