It took me a while to set-up, but I now have feeder club arrangements with three clubs:
Eastleigh are in the Skrill South and they get 17 year-old regens from my Southampton Academy, including several who aren't ever going to be good enough to play for my first team. I don't usually send players to them, rather just accept their requests.
Coventry City are in the Championship and they get any wonder kid foreign players that I have signed who are destined for greatness, but are not yet good enough for my first team. I select the players that I want to go to them and use the Send to affiliate option. While they're there, they can learn English (well, Brummy, anyway!) and/or start the process by which they become naturalised players.
Fiorentina were in Serie B when I made arrangements with them, but then got promoted to Serie A. My intention is that they will get my 19-21 year-old English players that I'm not currently using in the first team squad but do intend to use in future. They've only got one at the moment but I'll aim to send more players next season.
I still accept loan requests for my academy players from other clubs, as long as the club is at the correct level for that particular player (as identified in the text below the 'current ability' rating) and they intend to use him as a Key Player. I find it annoying, though, that you'll often get messages from your own coaching staff to say that the host team is playing the player in the wrong position. I don't care, as long as he's getting a regular game in one of his primary or secondary positions, that's okay - I'm not interested in picking another manager's team for him. There's no way to switch those messages off and speaking to the team's manager about it rarely achieves anything.
I usually have a couple of academy regens or purchased U21 players in the first team squad who I rotate in-and-out of the first and reserve team. I also like to buy young players but loan them back to their original club for a season while older players play out the last year of their contract - as long as they get a regular game for their original club, their 'current ability' will continue to improve and get closer to their 'potential ability', making them a better player when they join you the following summer.
Even the lesser quality regens have their uses. I have sold quite a few 22 year-old academy graduates for prices ranging from 1.5 - 4 million, with 10-or-15% sell-on clauses, after they have been loaned out and played their part in my first team rotation, for a while.