How Does Loan Syndication Work?
April 29, 2021
What is Loan Syndication?
Loan syndication is the process in which several lenders come together to finance a single borrower. Such a loan is termed a syndicated loan. A borrower, in this case, can be a large-scale project, an association, or the government. Only a fixed amount of funds are granted under loan syndication. A syndicated loan also helps the lenders to reduce the risk factor by spreading it among themselves.
Under this process, the terms and conditions are applied to all the lenders are preferred to be common but are generally similar.
Stages In Loan Syndication Process
The loan syndication process is divided into three stages i.e.
- Pre-sign in process - Further, it is divided into two subcategories:
- Pre mandate stage - A borrower initiates this stage of loan syndication. He either contacts a single lender or a debt syndicator and forms a strategy to get the required debt a lead bank is decided. After getting the approval from the lead bank, the Information memorandum alongwiththeh sanction is shared with various prospective leders.
- The next stage is the loan syndication procedure which involves approaching various prospective lenders with the IM and the sanction letter of the Lead lender. The process require coordinating with all the prospective lenders, providing information and follow-up till complete tie up with acceptable terms
- Post sign language process: This is the final stage of the process, also called the Execution stage. In this step, the entire loan is allocated to different lenders, Joint documents are prepared and executed, Pre-disbursement conditions are fulfilled, required Trust and Retention Accounts and sub accounts are opened, corporate authorisations are provided, and thereafter first disbursement is received. Till such time the debt syndicators hand holds the borrower for smooth disbursement.
Benefits Of Loan Syndication
- Obtain a large loan instantly - The funding required to finance large-scale projects for the governmental and infrastructure project is enormous. A single lender cannot fulfil this requirement. Therefore loan syndication makes it easy for you to obtain a large loan.
- Improve your market reputation - A syndicated loan involves multiple lenders for the financing aspect of a project. Such a loan indicates the borrower’s and Project’s acceptability by wide range of lenders. Hence paying back this loan on time improves your brand image and makes it easy for you to obtain finances in the future.
- Multifarious loan terms to fit your needs - Since several lenders participate in the loan procedure, you get the option to structure your loan into different categories and securities. It ensures that the borrower can pay back without any hassle.
- Efficient procedure - Large Loans are difficult to get sanction, once the lead lender sanctions the loan and sometimes underwrites the loan, the complete tie up becomes efficient as all other lenders normally follow the leader while sanctioning the terms and conditions. Otherwise, different terms and conditions may lead to high cost and cumbersome execution.
Functions Of Loan Syndication
The primary function of loan syndication is to meet the borrower’s demand for long term loans. A syndicated loan is mainly utilized by those people who wish to procure funds for their new projects in the sectors such as power, roads, telecommunication, transportation etc.
A syndicated loan is mainly granted for ten to twenty years for a large scale project. While for a short term project, it can vary from three to ten years. Interest rate is calculated in consideration of the requirements of different borrowers. Lending rate policies, provisions of the loan agreement and other regulations are kept in mind while calculating interest rate.
Best Loan Syndication In Gurgaon, Mumbai, And Jaipur
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