Bilateral and syndicated loans are significant sources of funding for companies. These loans can help you finance acquisitions, accelerate expansion or even keep you afloat during difficult periods.
However, the main question is: Which one is right for your business?
What is a bilateral loan?
As the name suggests, a bilateral loan involves one lender and one borrower. In this type of loan, a bank or financial institution provides the loan directly to only one borrower. Because of its simple setup, a bilateral loan typically offers the following benefits:
- More flexible loan terms, including the loan amount, interest, repayment terms, etc.
- Easier and faster negotiations
- Lower interest rates if you have a good relationship with the lender
- Faster approval and disbursement
However, the lender bears all the risk in this type of loan. This means they may ask for collateral, depending on your creditworthiness and history with the lender.
Additionally, bilateral loans typically offer less funding than syndicated loans, but they can still provide significant amounts.
What is a syndicated loan?
On the other hand, a syndicated loan involves multiple lenders. Since more lenders share the risk, you have access to more funding, which can be a major advantage if you need large-scale financing.
Furthermore, a syndicated loan can provide the following benefits:
- One of the lenders will be the lead arranger or agent, which means you do not have to transact with each lender directly
- May provide diverse loan terms and securities
- Can bolster your company’s image and increase creditworthiness if successful
The potential downside of a syndicated loan is its inherent complexity. Typically, this type of loan requires extensive paperwork and legal agreements. As a result, it can take longer to arrange and negotiate than bilateral loans.
How can you choose the right type of funding?
Bilateral and syndicated loans each have their unique pros and cons. That said, you will need to consider multiple factors carefully before making your choice. These include but are not limited to:
- The amount you need
- Your relationship with potential lenders
- Your risk profile
- The amount of time you have
- The flexibility you need
It may be more prudent to bring a legal professional into the conversation. A business lawyer can help you understand each loan’s implications and risks. Ultimately, due diligence and smart negotiations are key to securing funding without putting your business through unnecessary strain.
