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In the world of corporate finance, debt syndication (or loan syndication as more commonly called) has become a highly effective line of credit in recent years. Usually availed to obtain a considerable loan amount with ease, the associated perks of reduced credit exposure and paperwork only add to the formidability of the financial instrument.
The idea behind the debt syndication process is simple: one borrower, multiple lenders. When a borrower requires a loan sum too risky for one lender to bear, loan syndication can provide a way out.
In such cases, multiple lenders ally to provide various portions of the required funds to the borrower. And one financial institution from the syndicate acts as the intermediary to administer the entire syndication process, from risk division to disbursal.
Additional Read: What is Debt Syndication and Where is it Used?
Pros
- Competitive loan terms
Loan syndication facilitates low risk, which in turn allows the alliance of lenders to provide credit at competitive terms. As the syndicated lenders come forth with attractive loan facilities compiled under a single loan agreement, borrowers benefit from the reduced time and efforts.
On the fine print, terms and conditions of the loan are the same despite multiple lenders so that borrowers can manage the credit more easily.
- Structural Flexibility
Borrowers can avail of diverse loan terms with syndicated credit, including multiple currency loans, prepayment facility without the standard penalty, and risk management techniques, among others. As different lenders bear different portions of the loan, borrowers enjoy flexible structures with varied loan types and interest rates.
In consequence, not only can borrowers access the essential funds conveniently, they can use the debt syndication facility to handle multiple credit lines with relative ease.
- Enhanced market visibility
Syndicated loans can prove immensely beneficial for a business vying for attention in the international and domestic markets. Put simply, if various lenders are ready to finance projects for a borrower, the financial support adds to the credibility of the borrower and fosters a positive reputation.
Access to credit, therefore, becomes a lot easier for the borrower with enhanced visibility in the open market.
Cons
- Negotiations take time
Even with a lender intermediary, the formation of a syndicate takes time since the lenders require extensive documentation to become familiar with the borrower.
Loan term negotiations between the borrower and the syndicate are also clocked in weeks, if not months. As a result, the entire process ends up consuming more time than necessary.
- Difficulty in relationship management
Management of multiple lenders at once can quickly become a mammoth task unless the borrower knows how to take the bull by the horns. Because any delay in communication, even between the syndicated lenders, can complicate the credit lines unfavourably. And inevitably require additional effort from the borrower’s end.
Additional Read: Corporate Loan restructuring. Will it be a Boon or a Bane for the Economy?
To sum up
Syndicated solutions have undoubtedly become more lucrative alternatives to traditional commercial finance today. But like any credit facility, they come with both benefits and downsides, which ultimately boil down to the service provider.
With a vast network of connections, Tata Capital offers lucrative debt syndication servicesand structured finance solutions to consolidate your capital needs effectively. Avail of custom finance solutions to raise essential funds for robust business growth. Get in touch for further details.
