Bilateral and syndicated lending are two key financing options for businesses. Bilateral lending involves a single lender providing a loan to a single borrower, offering straightforward and customized terms. Syndicated lending involves multiple lenders pooling resources to fund larger projects—mitigating risk but increasing complexity.
Here are the differences, benefits, and considerations of each.
What is bilateral lending?
Bilateral lending is a financial arrangement in which a single lender, typically a bank or financial institution, provides a loan directly to a single borrower. This allows for tailored loan terms that suit the specific needs of both parties, including the loan amount, interest rate, repayment schedule, and any covenants or conditions.
Key characteristics of bilateral lending agreements include:
- Direct negotiations between one lender and one borrower, where loan terms are tailored to meet the specific needs of both parties.
- It’s easier to arrange and administer compared to multilateral or syndicated loans.
- More adaptable terms, including interest rates, repayment schedules, and covenants.
- Typically, it’s a faster approval and funding process.
What is syndicated lending?
Syndicated lending is a financing arrangement where multiple lenders come together to provide a large loan to a single borrower. This type of lending is commonly used for substantial financing needs that might be too large for a single lender to handle alone.
The loan is provided by a group of lenders, known as a syndicate, which can include banks, financial institutions, and other lending entities. This distribution of risk makes it feasible to extend large sums of money.
One of the lenders, typically a bank with a strong reputation and expertise, acts as the lead arranger or agent. This entity coordinates the loan, handles negotiations, and manages the administrative tasks on behalf of the syndicate.
Bilateral lending vs. syndicated lending: which is right for you?
Choosing the right type of loan involves evaluating your specific financial needs, the purpose of the loan, the amount required, and your ability to provide collateral.
A borrower might prefer a bilateral loan over a syndicated loan for several reasons:
- To keep it simple. Bilateral loans involve a single lender and borrower, making the process more straightforward than syndicated loans, which require coordination among multiple lenders.
- They want customization. Bilateral loans allow for tailored terms and conditions that can be specifically negotiated to meet the borrower's unique needs, offering greater flexibility in interest rates, repayment schedules, and covenants.
- They want a faster process. The approval and funding process for bilateral loans is typically faster, involving fewer parties and less administrative complexity.
- To avoid added operational costs. Bilateral loans often have lower administrative and arrangement expenses because they don’t require the level of coordination and documentation of syndicated loans.
- For easier ongoing management. Managing a bilateral loan is simpler for the borrower because they only have to deal with one lender for servicing, repayments, and compliance.
Borrowers might avoid bilateral loans in favor of syndicated loans for several reasons:
- They need larger loan amounts. Syndicated loans can provide access to much larger amounts of capital than a single lender might be willing or able to offer.
- Their needs are deemed risky. Syndicated loans spread the risk across multiple lenders, reducing each lender's exposure. This can make it easier for borrowers to obtain financing for riskier ventures.
- They have complex financing needs. Syndicated loans can offer the necessary sophistication and flexibility for more complex financing structu fres, like those requiring various tranches or different credit facilities.
- They are exploring better market terms. Syndicated loans can sometimes offer more competitive terms because the participation of multiple lenders can lead to better pricing and conditions.
Managing the funds after close
Staying compliant is critical to maintaining access to capital. Effective debt capital management ensures compliance, maintains lender confidence, and helps address issues promptly, regardless of the loan type.
For bilateral loans, the borrower makes scheduled principal and interest payments directly to the lender, provides regular financial statements, and ensures adherence to financial and operational covenants. They have to maintain the value of any pledged collateral and update the lender on its status. Operationally, this involves direct and frequent communication with the lender.
Teams use accounting and financial management software to track repayments and monitor financial health, keep detailed records of all transactions and communications, and promptly address potential covenant breaches or financial difficulties through direct negotiation.
In the case of syndicated loans, the borrower makes payments to the lead arranger, who then distributes them to the syndicate members. They need to provide detailed financial statements and performance reports regularly, ensuring compliance with financial and operational covenants monitored by the lead arranger. Collateral must be maintained, with updates provided to the lead arranger.
Teams must implement robust financial management and reporting systems, continuously review performance and compliance, maintain comprehensive documentation, and proactively manage financial health to address potential issues or covenant breaches by coordinating with the lead arranger.
Want to learn more about Finley's debt capital management software?
Finley is private credit management software that helps private credit borrowers and asset managers streamline and monitor asset-backed loans. From tracking covenants and deliverables, to assembling funding requests and analyzing asset performance, Finley gives borrowers and lenders peace of mind when it comes to debt capital management. For more, check out our Product page.
Interested in learning more about what it’s like to work at Finley? Check out our careers page.
