What is a syndicated loan and how does it work?

A syndicated loan is a type of corporate financing provided by a group of lenders—typically coordinated by a lead bank—that pools resources to finance a single borrower. Syndicated loans are often used when the loan amount is too large for a single financial institution to handle. They are an alternative to traditional bank loans, or “bilateral loans,” which generally involve one lender providing capital to one company.

Keep reading to learn more about syndicated loans, how they work and how to secure one.

What you’ll learn:

• Typically, syndicated loans are made by multiple lenders to a single borrower.
• One bank serves as the lead arranger of the syndicate and acts as the point of contact for the borrowing business.
• For business owners, the benefits of a syndicated loan include streamlined financing and access to more capital than a traditional loan may provide.
• Securing a syndicated loan requires a strategic plan with best practices, like gaining stakeholder buy-in before starting the process.

A syndicated loan is a type of business financing in which a group of lenders—or a syndicate—provides a fixed sum, a credit line or a combination of the two, with each lender responsible for a portion of the loan amount.

For businesses, a syndicated loan can help them access more money than a single lender can provide or meet their capital needs that exceed a lender’s tolerance for risk. For the bank syndicate, this financing strategy spreads the risk among the syndicate members, which is limited to each lender’s share of the loan.

Syndicated loans are commonly used by large corporations and other institutions, but they can also be used by midsize businesses that need a large sum of funding.

Syndicated loans work by allowing multiple lenders to share the funding, risk and administration of a single loan to one borrower. While every syndicated loan is different, they typically involve the following entities and processes:

• Lead arranger: The lead arranger, or arranger bank, works on the deal structure and runs the syndication process. It typically works closely with the borrower to prepare key documents like the term sheet, which lays out the amount of the loan, interest rate, fees, repayment timeline, and other terms and conditions.
• Joint lead arrangers: Depending on the loan size, the process may also include lenders known as joint lead arrangers. They tend to provide higher capital commitments and may also support syndication and distribution of the loan.
• Agent: The agent is generally in charge of administrative tasks and is the contractually obligated go-between for the lenders and the borrower.
• Trustee: The trustee is responsible for the borrower’s collateral asset. If the borrower defaults on the loan, the trustee is legally obligated to act in the lenders’ best interests and enforce the lenders’ security interests to help recover losses.

During a bank meeting, the borrower presents the company’s financial outlook to potential lenders, and the lead arranger negotiates the credit agreement. Lenders can be other banks or institutional investors, like hedge funds.

Usually, participants will provide commitments within a few weeks after the bank meeting. Then there’s a short review process to ensure correct documentation. The entire process generally takes several weeks to a few months, although the timing may vary depending on specific circumstances.

Apart from the syndication itself, syndicated loans work similarly to other business loans: They may come in the form of either traditional term loans or revolving lines of credit. But businesses in search of syndicated lending may also have a few deal options to choose from:

• Best-efforts syndication: With this type, the lead bank makes no obligation to fund the loan even in part, but rather works to find other lenders who will. This can be a good option for businesses with higher risk profiles or less certain demand from lenders.
• Club deal: A club deal brings together a group of lenders who generally share responsibility for the loan and its fees with the borrower, with whom they have an existing relationship. These loans are typically midsize deals and are often smaller than fully syndicated loans.
• Underwritten deal: Unlike in best-efforts syndication, the lead bank guarantees the entire loan in an underwritten deal, regardless of whether it’s able to find other lenders.

Syndicated loans offer businesses many benefits, such as access to larger funding amounts, streamlined financing and more adaptable terms than traditional loans. Key benefits include: 

• More capital: It provides more capital than a sole lender can provide, which can help growing businesses in need of a large influx of funding for major expenses.
• Less hassle: It streamlines financing, with businesses primarily working with the lead arranger instead of separately negotiating with multiple lenders.
• Flexibility: It can feature more flexible terms than a loan from a single lender and may offer additional options when lenders contribute different currencies.
• Increased legitimacy: It can serve as a possible precursor to larger capital-market transactions (e.g., bonds or initial public offerings).
• Strong financial relationships: It can give the borrower access to the full scope of banking products and services offered by the group of lenders they work with. Plus, it can help businesses develop banking relationships that will be important to their future growth.

Securing a syndicated loan requires planning and strategic decision-making. Here are five best practices to guide you through the process:

1. Secure buy-in from stakeholders. Buy-in from stakeholders at all levels helps ensure alignment and support across the organization. Securing executive buy-in and meeting with multiple stakeholder groups can take time and effort—so can creating the marketing materials and financial paperwork necessary for diligence—but the hard work is often necessary for the result.
2. Choose the right lead arranger. Because your lead arranger will negotiate credit terms and structure and sell the deal, the arranger will need a strong track record, experience and credibility.
3. Be transparent. Be open and transparent with the lead arranger throughout the process so they can support effective execution.
4. Be authentic. The authenticity of your management team and company story can help reassure lenders about the creditworthiness of your business.
5. Keep your options open. Determine which type of syndication deal is right for your business from timing and cost perspectives. The lead arranger can assist with evaluating the options.

Ultimately, a syndicated loan can boost your company’s liquidity and set it up for greater financial resilience. Having a clear understanding of the process, benefits and best practices can help make it easier to navigate.

If your business isn’t quite ready for a syndicated loan but is ready to explore more options for business financing, see if you’re pre-approved for a Capital One business card—without harming your credit scores. Look for the business-grade benefits and features that meet your business’s needs.