Legal Considerations in Cross-Border Cash Pooling

Because legal structures and documentation differ between physical cash pools and notional cash pools, the effects of financial distress on an organization’s cash flows depends on which of these structures defines the cash pool. The differences between a physical and a notional cash pool are significant.

In a physical cash pool, participants agree to move their excess cash on a periodic basis to an entity within the corporate group called the cash pool leader. The cash pool leader concentrates excess cash from participating business units and uses those funds for the benefit of the participants. Cash pool participants with a cash deficit can receive an intercompany loan from the cash pool leader and pay interest to the cash pool leader. Participants that contribute excess cash to the pool receive interest on the funds they make available. This structure enables a company to deploy cash to the best possible effect across the enterprise. Funds advanced to the cash pool leader appear as an asset on the balance sheet in the form of intercompany loans. Similarly, funds borrowed from the cash pool leader appear as a liability, classified as intercompany loans incurred.