Syndicated vs. Bilateral Business Loans: Understanding the Differences

A syndicated business loan is between an individual borrower and a group of lenders, while a bilateral loan is an agreement with only one lender. This primary difference means that syndicated loans are typically used by businesses to gain large amounts of financing. Bilateral loans are the more common type of personal loan, but they may be used in business if the circumstances are correct. Understanding the differences between the two loans will help a borrower know which type to pursue.

Syndicated Business Loan

Parties Involved: There are three groups involved in arranging a syndicated business loan: the borrower, arrangers, and the many lenders. The arrangers are the people who take on the task of locating the many lenders willing to participate in the loan. Arrangers are usually investment banks or professionals. 

Expenses: These types of loans are typically more expensive because a fee is paid to the arranger. The more complicated the investment deal, the higher the fee. Arrangers may prefer the challenge of a complicated deal where the borrower has less than perfect credit in order to obtain larger payoffs. The complicated structure of a syndicated loan typically means higher fees to the lender as well.

Commonly Used By: Large corporations or very expensive projects are more likely to seek syndicated loans. The expense is only justified if the borrower cannot arrange financing in a more simple and straightforward form. When a company is in need of a huge amount of liquidity and does not have a great financial history, though, this type of loan may be the only real option. 

Loan Terms: The cost to the borrower is usually arranged based on future profits and tend to be higher pay-offs for lenders. 

Bilateral Business Loan

Parties Involved: There are only two groups involved in this general loan category: the borrower and lender. The lender is one institution rather than many. 

Expenses: This loan is usually less expensive for the borrower because the lender is assuming less risk. The straightforward nature of the loan allows the lender to set more specific terms than if the lender was working with an arranger.

Commonly Used By: Bilateral business loans are usually used by small business owners looking for initial capital or funds to expand. While there is no "cap" per se on the financing available through bilateral loans, a business seeking a tremendous amount of financing may need to secure it from more than one source.

Loan Terms: These loans can be arranged as overdraft loans, term loans or revolving credit. Overdraft loans allow for an initial principal that may be paid off at any time without notice to the lender. They have higher interest rates but are incredibly flexible. Term loans are typical installment loans were a monthly payment is made until the loan eventually matures and is paid off. Revolving credit lines, just like credit cards, have a certain financing limit. A borrower can use the line up to the limit and decide when to pay down the balance.