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15 Mar, 2023
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When you need a substantial amount of loan in several lakhs or crores, borrowing the entire amount from a single loan company might not be possible. Such a huge amount may be beyond the lender's capacity, or the risk may be too high for them to furnish the complete sum alone. That is when a syndicated loan helps. In this process, you approach a lender with a loan request, and the lender brings other lenders on board to fulfil your requirement. It is an excellent way to get better loan terms with efficient loan management. For instance, they may provide easy Personal Loans for self-employed who need considerable amounts to fulfil their purposes.
Read on to understand loan syndication meaning, how it works, its types and benefits.
Want to know what loan syndication is? A syndicated loan is financing that a group of lenders offer to a single borrower. It is also known as a syndicated bank facility, and the lending group is termed a syndicate. When you need money for a large project, several lenders may work together to provide the required funding. It can be a fixed amount of loan, a line of credit, or a combination of both.
The participants in a syndicated loan may differ between deals, depending on the procedures and requirements of the borrower and the lending group. However, syndicated loan deals typically involve the following:
| Arranging Bank | Agent | Trustee |
| Also known as the lead manager, it is the finance company that you approach for organising the syndicate. This bank finds additional finance providers ready to join the syndicate and share the lending risks. The loan document contains conditions you agree with the arranging bank. | The agent is a link between you and the lenders, and they are obliged to both with a contract. They give lenders the information they require to know their rights under the syndicated loan agreement. It is not the agent's job to advise any party; they are not obligated to fiduciary duties. Their primary responsibility is related to administration. | The trustee is in charge of security enforcement per the lenders' instructions in case of a default. Therefore, they have the fiduciary responsibility, though limited to the lenders' syndicate. For the lender's benefit, they keep the borrower's assets as security in case of a secured loan. Since it can be an expensive process for the syndicate, they do not give the asset to individual lenders separately. |
As a borrower, you can enjoy several benefits with a syndicated loan. It is an excellent option when you need a substantial amount in less time. Here are a few advantages of the loan syndication process.
| Less Time and Effort Involved | Diversification of Loan Terms | Large Amount | Positive Reputation |
| While applying for a syndicated loan, you don't need to meet each lender individually. Instead, you only need to approach the arranging bank to discuss the loan requirement. It is the arranging bank’s responsibility to create the syndicate, enlist more lenders, and negotiate over the terms and conditions. Therefore, it saves a lot of time and effort during the loan syndication process. | Lenders may structure a syndicated loan into multiple loan terms and security types. It makes various loan options available, including fixed and floating interest rates. As a result, you get a more flexible loan structure. Besides, you can obtain loans in different currencies, shielding you against currency risks brought about by factors like inflation, compliance regulations, repayment terms, etc. | Since completing huge projects is challenging with a loan from a single lender, you can borrow larger amounts through loan syndication. It lets you borrow financing from various loan providers, making it easier to complete capital-intensive tasks. Several self-employed professionals borrow easy Personal Loans to launch start-ups, enlarge existing projects, enable mergers and acquisitions, lease properties, and finance other sizable operations. | During the loan syndication process, you get loans from multiple lenders, thus adding to your reputation in the financial market. When you successfully repay your loan, lending institutions see you favourably, making it easier for you to obtain more loans in the future. |
There are three basic types of loan syndication. They are as follows:
| Underwritten Deal | Best-Efforts Syndication | Club Deal |
| The arranging bank takes responsibility for guaranteeing the loan amount. That means it takes over the loan portion that other lenders do not provide. | The arranging bank does not guarantee but seeks other loan providers to participate in the syndicate. It capitalises on positive market conditions to attract new financers. If the loan remains insufficient despite the arranging bank's best efforts, you can cancel the loan requirement or accept a smaller loan amount. | Each club member contributes equally to the loan syndicate in a club deal. In return, each loan provider receives an equal portion of the fee. |
If you want to apply for a syndicated loan, you must understand the loan syndication process. This is how it works:
Loan syndication means that it is a helpful process if you are looking for substantial funding. When you approach your preferred bank and assign it as your arranging bank, it brings other lenders together to organise the required amount. The loan syndication process also allows seamless loan management and easy execution, providing you with the desired amount and minimising the lender's risk. Discover syndicated loan opportunities with various online money lending apps and approach one that best suits your requirements.
1. What is a loan syndication agent?
A loan syndication agent is a mediator between the lender and the borrower. They ensure smooth loan syndication operations, channel funds from various banks to borrowers, and monitor timely repayment.
2. Is loan syndication investment banking?
Providing financial services for institutional and corporate customers, such as raising capital, arranging mergers and acquisitions, etc., is investment banking. Since borrowers can use a syndicated loan for such purposes, it can be said that loan syndication is investment banking.
3. Who uses syndicated loans?
Any borrower who requires a substantial loan amount can use a syndicated loan. Whether you are a retail customer, business owner, or government entity, you can take advantage of the loan syndication process to borrow a considerable amount and repay in EMIs.
4. Is loan syndication a bond?
A syndicated loan obtains money from lenders. In contrast, a bond brings money from the public when a company sells them. So, both are different, and loan syndication is not a bond.
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The act of paying out money for any kind of transaction is known as disbursement. From a lending perspective this usual implies the transfer of the loan amount to the borrower. It may cover paying to operate a business, dividend payments, cash outflow etc. So if disbursements are more than revenues, then cash flow of an entity is negative, and may indicate possible insolvency.
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