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Syndicated Loan: Definition & How it Works

Updated: February 27, 2023

Have you been wondering how the different types of loans work and how they can affect your business? Maybe you’re just curious about some of the benefits that can come from various types of loans. There are many types and they each serve different purposes.

This guide will break down what a syndicated loan is and how it works. We’ll also dive into some of the biggest pros and cons, some best practices, and an example of it in use. Read on to learn more!

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    • A syndicated loan is a type of financing that is offered by more than one lender, usually in a group. They work together to spread out the risk and provide the financing to a single borrower.
    • The borrower of the loan can be from different areas. For example, it could be for a large product, needed by a corporation, or even a sovereign government.
    • Syndicated loans can include either fixed or floating interest rates that are based on the benchmark rate.

    What Is a Syndicated Loan?

    A syndicated loan is a type of financing that is offered by a group of lenders. These lenders are known or referred to as a syndicate and they work together to provide financing funds for a borrower. A syndicated loan can also be known as a syndicated bank facility. 

    The type of borrower can range depending on who needs the financing. For example, it could be a sovereign government, a corporation, or even a large project. The loan that’s provided can also be given in a few different ways. 

    It could be through a credit line or as a fixed amount of funds. Or, it could even be a combination of both. Syndication loans are most common when the requirements for financing are too large for a single lender. They can also help if there’s a need for a specialized lender that has a level of expertise in an asset class. 

    One of the biggest benefits of a syndicated loan is that lenders can spread out the potential risk and can explore additional financial opportunities. This happens if those opportunities are too big for the individual capital base they currently have.

     As well, syndicated loan agreements can see fixed or floating interest rates and they’re usually based off of a benchmark rate. For example, the London Interbank Offered Rate (LIBOR) provides an average of interest rates that most major global banks use when they borrow from one another.

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    Syndicated Loan Procedure and Participants 

    Syndicated loan deals are going to vary from one to another and there can be different participants involved. But with that said, some common participants often follow the same types of procedures. 

    It starts with the arranging bank or financial institution, which is also known as the lead manager. It’s mandated by the borrower to try and organize their funding based on the agreed terms of the syndicated loan. From here, the bank needs to acquire other lending parties that are interested in taking part and sharing the lending risks. 

    A term sheet will be created that will outline the financial terms that were negotiated between the bank and the borrower. It will include things like the repayment schedule, the amount of the loan, the duration of the loan, the interest rate, and any other relevant fees. 

    An agent in a syndicated loan helps bridge the gap between the lenders and the borrower and there’s a contractual obligation to both. The main role of the agent is to provide lenders with the right information they need. Essentially, the agent acts in an administrative role.

    Another participant in the syndication process is the trustee, who is responsible for holding the security of the assets. In the event of default of the syndicated loan, the trustee will have to enforce any security outlined in the original instructions from the lender. Their only fiduciary responsibility is to the lenders. 

    Advantages of a Syndicated Loan 

    Within a syndicated loan there can be several advantages to know and understand. Having more than an individual lender can lead to a financial opportunity for a loan agreement that might not otherwise be available. 

    Here are some of the biggest advantages to be aware of for syndication loan types:

    • There becomes a diversification of loan terms: Having multiple lenders involved means that the loan can be structured in different ways. Having varying types of interest like fixed or floating provides the borrower with added flexibility. 
    • There is less effort required: Even though there are multiple lenders, the borrower only has to meet with the arranging bank to outline and determine the terms of the loan. The bank then takes on the biggest role of working with the syndicate and bringing them on board. 
    • The loan can be a large amount: A single lender is only able to provide loans up to a certain amount due to a limit on their own capital. But a syndicated loan allows for huge loan amounts to help finance capital-intensive projects. This can be for any number of things, such as large equipment leasing and mergers. It can also include financing larger transactions in energy, transportation, petrochemical, mining, and telecommunications. 
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    Disadvantages of a Syndicated Loan 

    While there are several advantages that come with a syndicated loan, there are also a few disadvantages that are worth knowing about and understanding. This can help you stay prepared for potential issues in the future. 

    • It can be time-consuming: Negotiating with a single bank could potentially take up to a few days. This can make the process feel lengthy and time-consuming. 
    • It can be difficult managing relationships: Balancing the demands of multiple relationships at once can be a challenge. Plus, it requires a significant investment of both time and money. 

    Best Practices of a Syndicated Loan 

    Since a syndicated loan will involve multiple lenders, following a few best practices can help ensure the process goes smoothly. Here are some best practices to keep in mind:

    • Always be authentic
    • Always be transparent 
    • Consider which execution method is best
    • Make sure to pick the right lead arranger 
    • Prepare for the amount of work it could take

    Syndicated Loan Example 

    After some research and planning you have decided to go to the bank for a new loan for your business. You have a standing relationship with the bank and the loan is approved relatively quickly. However, the large amount of the loan is greater than the risk tolerance the bank has. 

    So, in this case, it decides to form a loan syndicate to help spread out risk. The bank acts as the lead agent and then brings together other financial institutions to participate. 


    Syndicated loan structures allow for financing from a group of additional lenders. The requested loan, or prospective loan, is going to differ compared to standard bank loans. 

    This is because the potential lenders can spread out any potential risk, compared to a sole lender that would take on all of the risk themselves. Syndicated loans can be a great opportunity for borrowers to help with the cost of funding projects or other capital commitments.

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    FAQs About Syndicated Loan

    Why Do Loans Get Syndicated?

    Loans can get syndicated so that each lender in the lending group will share part of the risk. This can be important since syndicated loans can often be larger amounts compared to traditional bank loans.

    What Is the Loan Syndication Fee?

    The loan syndication fee has to do with the services that the lead manager undertakes to syndicate the loan on behalf of the borrower. There’s a lot of work in this and the fee can typically range anywhere from 5% to 10% of the loan principal.

    Is Syndicated Loan Security?

    Lower courts in the United States have stated that syndicated loans aren’t considered securities.


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