When you are about to start a company or you already own a company, it is obvious that you will need huge amounts of funds in order to run it smoothly. Now there are times that you may not have sufficient funds to invest in your company even when the company is in partnership because it may happen that even your partners are falling short of funds. This is the time when you may have to resort to loan. Now there are different types of loan that you can go for. But in this article, we are only concerned about syndicated loans.
In this article, we will learn about the fact that why syndicated loans are best for your company along with some other important details.
What is a Syndicated Loan?
Before we move on to any further details about syndicated loans, let us first learn what syndicated loan exactly is. To define it simply, syndicated loans are loans which are made by either two or more lenders and is administered by a common agent. The common agent uses similar terms and conditions along with common documentation. Most syndicated loans are the creation of an alliance of smaller financial and banking institutions that join forces together in order to meet the credit demand of the borrower.
Syndicated loans are usually signed six to eight weeks after the mandate has been passed and once the signing is being done, the borrower is allowed to draw funds. Borrowers who take syndicated loans are required to pay upfront fees along with the annual charges to the participating banks with interest right from the initial draw-down date.
What are the main advantages of Syndicated Loans?
There are several advantages that come tagged along with syndicated loans and this is the reason why it is considered to be the best type of loan for the companies. For your information these are the main benefits that the owners of a company can avail from the use of syndicated loans:
- The first main advantage of syndicated loans is that it allows the borrower to access help from a diverse group of banking institutions. This helps the company to raise the funds more cheaply in comparison to a series of bilateral loans. The total savings increases as the loan amount rise.
- The second main advantage of syndicated loan is that it can increase competition for your business, prompting other banking institutions to put in more effort in order to put forward market information in front of you in the hope of being recognized.
- Syndicated loans also provide flexibility in structure and pricing. With syndicated loans, the borrowers can have a plenty of options for shaping their loan which includes multi-currency options, prepayment rights without penalty and risk management techniques.
- With the help of syndicated loans you can have the best prices on aggregate and thus, you do not have to waste your time and effort to negotiate individually with each bank.
- You can also increase the visibility of your company in the market with the help of syndicated loans.
So, these are some of the biggest advantages that a particular company or rather it’s owners can avail from the use of syndicated loans. Now that you know about it, you can decide well for your business.
What are the different types of Syndicated Loans?
After going through the various advantages of syndicated loans now, it’s time to learn about the different types of syndicated loans that are available. Speaking of the different types of syndicated loans, there are three types of syndicated loans that one can avail and they are as follows:
- Underwritten Deal: In this type of syndicated loan the underwriter or the lead agent syndicates the entire loan. In case if the full deal is not subscribed for whatever reason, the lead agency has the full right to absorb the part of the loan that isn’t been subscribed. Understanding by the nature of this type of syndicated loan, it can be clearly stated that this is the type of syndicated loan that is just perfect for big business houses.
- Club Deal: This is the type of syndicated loan that generally deals in a smaller amount. In this syndicated loan the lead agent and the other syndication members share equal or nearly equal parts of the amount that is being earned from the loan. This is the type of syndicated loan that is ideal for small business as they are more likely to sign up for smaller loan amounts in comparison to the other big companies.
- Best-Efforts Syndication Deal: In this type of syndicated loan the lead agent doesn’t guarantee or commit the entire loan amount. If there is any unsubscribed portion of the loan then, that will be filled up by taking advantage of the changes in the market conditions. In case if the loan is still unsubscribed then the borrower is asked or forced to accept a lower loan amount or else the entire loan amount is canceled Both big and medium-sized companies can opt for this type of syndicated loans when required.
So these are the different types of syndicated loans that are available out there. Depending on a company’s need you can opt for any of these types of syndicated loans as mentioned above. Now that you have a complete knowledge of the different types of syndicated loans, it will be easier for you to take your decision.
Thus, from the above discussion it can be concluded that more than the bilateral loans, syndicated loans are better for companies as they provide the companies with the best prices on aggregate. Not only that, but the companies can even avail the loan at cheaper amounts which are really beneficial for the small companies who cannot afford big interest amounts. Let’s not forget that your company can also get more recognition in the market with the help of syndicated loans.