Is Loan Syndication the Future of Business Financing? Experts Weigh In!!

Loan syndication is a process where multiple lenders come together to provide a single loan. A certain part of the loan comes from every lender. Each of them shares a part of the liability.

When is loan syndication required? Often borrowers claim a huge amount. However, that is not the problem. The problem appears when the borrower is eligible for that amount.

However, the bank or financial institutions might be less prepared to disburse the whole amount at a time.

The Lending Process

Multiple lenders come together to form a funds pool. A separate trust looks after the fund. Meanwhile, the borrower collects the required funds from that pool/trust.

What are loan syndications?

Loan syndication is mostly used in corporate financing or business financing. Firstly, loan syndications approved loans of entrepreneurs or corporate bodies seeking bulk loans.

They can ask for loans due to various reasons. It can be a merger, buyout, acquisition, or something else. The capital project needs a spontaneous volume of money. It can burn out the resources of a single lender.

However, the collective trust forms a single loan agreement with the borrower only. On that note, borrowers may ask- whom to pay back and how much.

Each lender is liable to receive the percentage of the loan disbursed from their end. In the case of collateral requirements, the process is different. Otherwise, all participating banks have similar terms to the borrower.

Can individual lenders step in?

Individual lenders can step in if they can afford the full payment. The Syndicate cannot disallow a single lender to give out the loan if it can afford the value.

Role of corporate managers

There is a risk manager for this joint venture. The corporate risk manager handles the agreements between lenders and recipients. Firstly, he steps in, whenever there is any misunderstanding.

Secondly, he does so, in case of contractual obligations. The main lender has due diligence. However corporate costs might increase if there is a lack of supervision or oversight. Each lender has individual counsel to manage or enforce loan covenants.

Fact Sheet

In the USA, the Loan Syndications and Trading Association provides essential resources for loan syndications.

The association gathers loan market participants, provides detailed insights about the market, and influences compliance procedures with industry regulations.

Loan syndication roles

In every loan syndication, there is a primary Bank. It is a leading institution that coordinates the transaction. The exchange of funds and receipt of funds from the borrower takes place through this bank.

Therefore, this Bank enjoys the transaction charges, compliance, and loan management fees received from the borrower. This Bank also looks for regular repayment from the bore.

It also includes loan monitoring and reporting any loan fraud or EMI payment delay to the CIBIL bureau.

Explaining How Loan Syndication Works?

Let’s understand the function of loan syndication with an example. Firstly, we will assume that company A wants to buy and revamp the restaurant.

Later they want to build a series of restaurants starting from this one. There will be multi-storied buildings in alignment. The loan requirement for the same project is USD 1 billion.

Firstly, the company approaches JP Morgan. The proprietors have good CIBIL and JP Morgan approves the loan. However, there is an issue. The risk tolerance of the bank is not as high as it is required for this loan. Now JP Morgan calls other banks to form the loan syndication.

Secondly, JP Morgan remains in charge of loan disbursement and handling. Meanwhile, other banks accumulate their funds. The following banks in the project can be Bank of America, Wells Fargo, Citibank, and others. These are some primary names in the US that take part in loan syndication projects.

Thirdly, we assume that JP Morgan gives USD 300 million towards a loan. The other members give the rest of the USD 700 million for the project.

However, we have JP Morgan as our mean bank here. So, JP Morgan will decide the loan terms. However, you can propose different terms or request an upgrade of terms as a participating Bank. However, JP Morgan will receive back the amount after the loan tenure is over.

After that, the proportion, as per the share of loan receipts will be given out to the participating banks.

Step-by-Step Guide

Firstly, you will approach a single Bank for the loan. After that, the bank will consider your loan eligibility. If you gain approval, the bank will check the funds availability. If the full font is unavailable, the bank will contact other banks for assistance.

However, your point of contact will be the first bank you approached. The banking legislation also provides you with the authority to choose any other bank in the loan syndication as your primary Bank. In that case documentation of collateral assignments is necessary.

Participants in loan syndication

Two or more banks can take part in the process. One bank is the primary bank or the agent of the Syndicate. This Bank looks after the documentation and repayment part. Meanwhile, you will also consider this bank and its representatives as your point of contact.

Then the same primary bank will filter payments to the other banks in the process. You will be liable to repay the loan to this Bank only.

Does A Loan Syndication Affect Borrowers?

Loan syndication does not impact borrowers. They receive their capital from other banks if a single bank is unable to provide it only.

However there are some repercussions when more than one bank is involved. Firstly, you have to wait for a longer time before the final deal is done.

Secondly, access to full capital at once might not be possible. Thirdly you might have to pay higher fees. Often the loan terms and fees vary from one bank to another. Besides, a lot of paperwork and handling activities are involved. You have to pay mode to get all these activities assorted in your favor.

Lastly, you cannot share the liability with more than one bank. In case there is a discrepancy from any of the banks, you cannot approach it directly.

The Disadvantages of Loan Syndication

The main advantage of loan syndication is that you get a big loan amount sanctioned. On that note, the single Bank might not be able to disburse the whole amount. However several banks came together to support the loan. Other than this, there are no major benefits of loan syndication.

It can charge you higher fees. Secondly, it can make you wait for a long time. Let’s say there are five banks in the process. 3 of the banks agree to give you the loan. After that, the last two disagreed. In that case, your loan approval will be finally rejected, or it will be delayed heavily.

It might take several days or several weeks to get the final approval. The Syndicate might change loan terms or conditions later. However, you have to unconditionally align and agree to all the terms.

The final call

Often several companies demand multiple big loans from various banks. But the banks have a loan range. It is difficult for the bank to go over that range for a single lender. In that case, the bank considers the loan worthiness. Let’s say, a big realty group wants a genuine loan from you for a huge project.

If your bank can associate its name with the project, it will be a matter of pride. However, you cannot afford to pay the bulk amount. In that case, you act as the primary bank and sponsor the majority of the share.

If not, you share at least the highest proportionate single share. For example, if the loan value is 1 billion, you afford at least 300 to 400 billion.

Meanwhile, the rest of the banks can share the remaining value. However, the primary bank is liable to share the loan contract with the borrower.

At the same time, the bank will look after regular payments. The bank will also divide the payment among syndicate members. Lastly, the bank will share the majority of the risk. It is the liability of this bank to ensure that each participating bank gets back their value, which is the interest due.

The biggest disadvantage of loan syndication is it can lead to a longer waiting time before approval. If you have any more queries about loan syndication, reach out to us.