Understanding the Difference between Syndicated and Bilateral Business Loans

Not all business loans are created equally. Some are syndicated, and some are bilateral. A syndicated business loan is a loan agreement between an individual and several different lenders. A bilateral business loan is a loan agreement between an individual and one lender. While syndicated loans are the more commonly seen loan type in the business world, bilateral loans also have their uses. Let's take a closer look at each loan type so potential borrowers can understand which one is better for them. 

Syndicated Business Loans

For syndicated business loans, there are several entities involved. There is the borrower, multiple lenders, and arrangers who work to locate the lenders for the individual borrower. The people who arrange the loan are usually professionals or investment bankers. There are several expenses associated with these loans, because not only is a fee paid to the people who arrange the loan, but the lenders will charge more for the loan, too. The arrangers will charge more for more complex or difficult situations, such as a high loan request without good credit.

These loans are most commonly used by large companies, or for projects that require large sums of money. Generally speaking, this type of loan should only be used when a simpler loan form is not an option, unless the expense of the loan can be justified by the rate of return on the investment. If the company doesn’t have a strong financial background, using this loan type may be the only way they can secure funding. 

The specific terms of the loan are based on the company’s future expected profits. Lenders usually elect to participate in this loan type because of the high pay off for them. 

Bilateral Business Loans

With a bilateral business loan, the only two parties are the lender and the borrower. Instead of multiple lenders, the borrower deals directly with the bank, and saves money by not having to hire people to seek out the financing lender. These loans are not as expensive for the borrower because the lender is not assuming a large amount of risk. Since the loan is not as complex, the loan terms can be clearly set forth by the lender. This is another reason why the loans are less expensive.

These loans are most commonly used by small business owners who are looking to either start or expand a business. There isn’t a limit on the amount of funding through this loan type, but depending on the exact amount, the funds may need to come from more than one place.  Loan terms will vary, based on the lender, the loan amount, and the borrower’s credit record. The specific loan terms can be a revolving line of credit, like a credit card, an overdraft loan, which has an higher interest rate but offers more flexibility, or a term loan. 

Generally speaking, a syndicated business loan is best suited for large businesses or large expenses, while a bilateral loan is better for small businesses.

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