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Can fees to guarantee a term loan be classified as interest expense

We are a corporation 100% owned by an investment company ("Parent") and we recently closed a term loan with the bank.  The Parent has provided full guaranty on the loan in the event of default.  In exchange for this guaranty, the Parent is charging us a "guaranty management fee" equal to X% of the outstanding quarterly loan balance.  The management fee will decrease each quarter as the loan principal is paid down.  Would this fee be considered interest expense?

Answers

Topic Expert
Barrett Peterson
Title: Senior Manager, Actg Stnds & Analysis
Company: TTX
(Senior Manager, Actg Stnds & Analysis, TTX) |

Intercompany charges can be difficult. If the fee charged is comparable to 3rd party insurance or guarantee fees, yes it can be part of financing costs, with disclosure of the fee and guarantor in seperate company financial statements. If the fee is larger than 3rd party services, it is more in the nature of a management fee and should be reflected as such. You probably have several charges from the parent, whcih should be assembled together in a "related parties" footnote for disclosure.

Alan Brown
Title: Presidnet
Company: MIDCAP LTD
LinkedIn Profile
(Presidnet, MIDCAP LTD) |

Barrett, wondering if you know typical terms of Guarantee fees or compensation paid to third parties. If its a % of loan guaranteed, what is typical. When collateral is posted in the form of LCs or CDs, any ideas of those terms?

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