Financial Wellness Report · Question

How do related-party transactions affect the way a lender sees my business?

Short answer

Related-party dealings, meaning transactions with group companies, relatives, partners or entities the promoters control, make lenders ask whether the numbers reflect genuine arm's-length business. They can blur real turnover, tie up cash and hide risk. Transparent disclosure, written agreements and fair terms keep such dealings from damaging trust.

In more detail

A credit officer wants to know what the business earns from outsiders and how it stands alone. Related-party flows complicate that in several ways.

Turnover quality: sales to a sister concern may not be true independent demand, and circular billing can inflate reported turnover.
Cash leakage: loans or advances to group entities, or large payments to promoters, reduce the cash available to service the lender's money.
Asset quality: receivables from related parties may be slow or may never be collected, and are often discounted.
Pricing: transactions at unusual prices can shift profit between entities.
Contagion: stress in one group concern can spill into another through guarantees or shared funds.

None of this means such dealings are wrong. Many groups share premises, trade between units, or lend each other money for good reasons. The issue is visibility and fairness.

Practices that reassure

Disclose related parties upfront and completely, in the notes to your accounts and in your proposal. Keep written agreements for loans, rent and supply, with terms similar to those you would give an outsider. Settle balances regularly rather than letting them drift, and avoid taking money out of the business just before a lender reviews it.

A manufacturer with a trading arm

A manufacturer sells a large share of its output to a promoter-owned trading firm. It explains the structure, shows the trader's onward sales to independent buyers, shows that payments are received on normal terms, and provides both entities' accounts. The lender can now judge the combined position rather than guess.

Some lenders consider group exposure as a whole, so be ready to show how the group stands together. How far a lender weighs these dealings depends on its own policy.

Key points

Related-party flows make lenders question the independence of your turnover and margins.
Loans to group concerns and promoter withdrawals reduce cash available for repayment.
Related-party receivables are often discounted because collection is less certain.
Disclose them fully, document them in writing and keep terms close to arm's length.
Be prepared to show group financials if the lender looks at combined exposure.

Who this applies to

Promoter-led businesses that trade or share funds with group entities.
Family-run firms where relatives lend to or buy from the business.
Owners whose accounts show sizeable loans to or from related concerns.

Last reviewed 3 October 2026

This answer is general information, not advice on your particular case. Terms, eligibility, and requirements change, so check the current position with the relevant institution or authority. Lalsar Holdings' financial advisory and financing work is advisory and facilitation only. Lalsar Holdings is not a lender. Sanction and disbursement of any credit facility is at the sole discretion of the partner bank, NBFC, or financial institution involved, subject to their own eligibility criteria and credit policy.