Thinking about expanding your business? You may want to consider a syndicated loan to fund your company’s financial needs.
While commonly associated with large, acquisition-focused corporations, syndicated loans can offer growing middle market businesses one-stop access to more capital than traditional loans. The global syndicated loans market is projected to generate $3,798.4 billion by 2031.1
What are syndicated loans?
Syndicated loans involve groups of lenders, or “syndicates,” coming together to offer a single loan. If a borrower needs a large loan that a single lender is unable to accommodate—or if a loan is outside of that lender’s risk exposure—multiple lenders can form a syndicate to share the risk and financial opportunity.
Syndicated loans can provide funding for capital expenditures, refinancing, acquisitions, leveraged buyouts, or the return of capital to shareholders.
There are a few reasons a borrower might want to consider a syndicated loan:
Loans structured with multiple lenders offer various loan types and interest rates, offering greater flexibility with different repayment terms.
Higher loan amounts
A group of lenders can pull together greater financial resources, allowing borrowers to finance capital-intensive projects like mergers or large equipment leases.
Borrowers that successfully repay a syndicated loan can maintain a positive market image with multiple lenders, making it easier to access credit in the future.
How does syndicated lending work?
Loan syndicates can vary from one deal to the next, but the main parties typically include:
The arranging bank is responsible for organizing the funding based on the specific loan term agreements, such as loan amount, repayment schedule, and loan duration. The arranging bank carries most of the loan and distributes cash flows among the other lenders within the syndicate.
The agent has a contractual obligation to serve both the borrower and the lenders within a syndicated loan. This administrative role provides syndicate participants with the information that allows them to exercise their rights under the loan agreement, but the agent is not required to advise either the borrower or the lenders.
The trustee holds the security of the borrower’s asset on behalf of the lenders. If a loan default occurs, the trustee has fiduciary duty to the lenders to enforce the security on their behalf.
The four main types of syndicated loans:
- Traditional term loans stipulate a repayment schedule and have either a fixed or floating interest rate.
- Revolving credit lines allow your business to draw down funds and repay and reborrow as needed.
- Letters of credit (LOCs) are guarantees provided by your lenders to pay off your debt obligations if your company can’t.
- Equipment/acquisition lines are used during a specific period to make acquisitions or purchase assets or equipment.
Syndicated loans can offer growing middle market businesses one-stop access to more capital than traditional loans.
Advantages of syndicated loans
Gain access to growth capital.
Business owners should always anticipate the next expansion steps for their companies—and be mindful of the cost of growth. When companies grow, they need greater access to capital than they do when simply navigating operational challenges. In fact, more than a third of budding businesses fail because they run out of cash.2 Take a look at other sources of capital before reaching any limits on what a single bank can lend to you.
It takes time for a lead arranger to develop a thorough understanding of your company’s growth strategy, liquidity, and cash flow—all needed to establish syndicated credit to fund your business plans.
If your company requires $10 million for working capital now but spots an opportunity for a $40 million acquisition in the future, your banker may look beyond your short-term needs and start syndicating a $50 million credit facility—so you can act when ready.
For larger sums, your banker might suggest a non-bank syndication, which could include pension funds, hedge funds, or commercial finance firms.
Reduce risk for borrower and lender.
Lenders prefer syndicated loans when working with large sums because a group of bankers can provide access to more capital while sharing the risk. Syndicated loans also mitigate risk for you since your company isn’t entirely indebted to one lender—and they offer your business an opportunity to establish broader financial relationships with multiple lenders. Over time, these lenders will become more familiar with your business, and you’ll have more options to access capital.