Holdco Loans to Opco: Financing an Ontario Business Purchase Through the Corporate Structure

When an Ontario buyer sets up to purchase a business, the entity that signs the loan documents is often not the entity that runs the business day to day. Instead, the buyer incorporates a holding company ("Holdco"), which owns the shares of the operating company ("Opco") — the business being purchased or the newco that holds its assets. That split raises a practical question buyers ask early: if the bank's money goes to Holdco, how does it actually reach the business Holdco is buying?

The short answer is that it depends on how the deal is structured, and the route the money takes has real consequences for security, guarantees, and — eventually — tax. This article walks through the two common ways financing moves from Holdco to Opco, and what a lender typically wants to see regardless of the route chosen.

Why a Holdco Sits Above the Operating Business at All

Buyers use a holdco structure for reasons that go beyond the financing itself:

• Separating risk. Keeping the acquisition debt and the buyer's personal exposure at the Holdco level, one step removed from day-to-day operating liabilities.
• Flexibility for the future. A holdco can make it easier to reorganize, bring in investors, or eventually sell shares of Opco (or Holdco) without unwinding the operating business itself.
• Consolidating multiple investments. Buyers who already own, or plan to acquire, more than one operating business sometimes use a single holdco as the common parent.

None of this changes the basic problem: the loan is typically advanced to Holdco, and the business — with its revenue, assets, and cash flow — sits inside Opco.

Two Common Ways the Financing Reaches Opco

1. The intercompany loan route

Holdco borrows from the lender and then re-lends some or all of the proceeds down to Opco, documented with its own intercompany promissory note (and, in many deals, its own security agreement between Holdco and Opco). Opco then uses those funds directly — for example, to pay part of the purchase price for assets it is acquiring, or to fund working capital. This route creates a clear paper trail showing the money physically moving into the operating business.

2. The share-purchase-plus-security route

In many share purchases, Holdco uses the loan proceeds to pay the seller directly for the shares of Opco — the money never passes through Opco's own bank account at all. Because Opco itself didn't receive any cash, the lender instead looks to Opco's ongoing business to support repayment indirectly, by requiring:

• A guarantee from Opco of Holdco's debt, and
• Security registered against Opco's own assets — typically a general security agreement registered under the Personal Property Security Act, R.S.O. 1990, c. P.10 (PPSA) — even though Opco never touched the loan proceeds itself.

Both routes are common in Ontario acquisitions, and the choice often comes down to whether the deal is structured as an asset purchase (where Opco, or a newco, is the one actually buying assets and can use funds directly) or a share purchase (where the money goes to the seller for the shares, and Opco's guarantee and security do the rest of the work).

What a Lender Wants to See Either Way

Regardless of which route is used, a senior lender will typically insist on:

• Security over Opco's assets (registered under the PPSA), not just Holdco's shares in Opco
• A guarantee from Opco, properly authorized by its own board of directors
• Confirmation that dividends can flow up from Opco to Holdco to service the loan, without being blocked by other creditor arrangements
• Corporate authorizations showing Opco's board turned its mind to approving a guarantee or security interest for a debt that primarily benefited its new shareholder rather than Opco itself — a governance step your lawyer builds into the closing documents

Because Opco is being asked to stand behind debt it may not have directly received, lenders are often particular about seeing these authorizations done properly and in the right order relative to closing.

Where This Structure Often Leads Next

A Holdco-Opco split with an intercompany loan or an upstream guarantee is frequently just the starting position. Once the deal has closed and the dust has settled, many buyers look at whether it makes sense to combine Holdco and the operating company into a single entity, so the acquisition debt sits directly on the business that generates the cash to repay it, rather than one level removed. That's a separate legal and tax step, done deliberately and with its own set of considerations — not something to assume will happen automatically.

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