When it comes to raising finance, companies have several options. These may include equity or debt finance. Similarly, within each of these categories, companies have various possibilities. Which one of these sources companies use depends on their preferences and capital structures. Likewise, companies may decide on the source depending on the size of the project for which they want funds.
When it comes to large projects, companies may want to generate higher funds. Obtaining these funds through equity may not be an option or may have restrictions. Therefore, companies may use debt finance. Within debt finance, companies can use various types of loans from financial institutions or issue bonds.
What are Syndicated Loans?
For large projects, companies may obtain syndicated loans. These are loans that don’t come from a single financial institution. Usually, syndicated loans come from a group of lenders, each known as a syndicate. These lenders cooperate and work together to provide a single entity with funds. These entities include companies, the government, or large projects.
Syndicated loans are necessary when a single financial institution can’t fund the financial needs of an entity. They can also be crucial when a project requires a specialized lender with expertise in a specific asset class. Syndicated loans can be beneficial for lenders looking to spread their risks while also availing financial opportunities.
The interest rates on syndicated loans differ according to the lenders’ preferences. For example, some lenders may prefer fixed rates, while others may prefer floating rates. Ultimately, all participants in the lender group must agree to a common type of interest rate.
For the borrower, syndicated loans are not as complicated. It is because borrowers deal with the lead bank, also known as the underwriter. The lead bank assumes charge of all the administrative tasks related to the loan. Similarly, it also receives the repayments and distributes them to each participant in the group of lenders. The lead bank may also put in a larger portion of funds in the overall loan.
What are Bonds?
Another option that companies have to obtain funds from a group of lenders is bonds. Unlike loans, bonds do not come from financial institutions only. Investors can then buy bonds directly from entities and get entitled to interest payments. Similarly, they get the face value of the bond repaid at its maturity.
The interest on bonds is usually fixed-rate. However, some bonds may also come with variable interest rates. Similarly, the bond will also define the payment periods, which are the dates on which investors receive their interest payments. Once the bond reaches its maturity, the issuer will repay the bond’s face value to whoever holds it.
Unlike syndicated loans, companies may not be able to generate significant finance with bonds. However, issuing bonds may be an easier way to generate finance compared to obtaining syndicated loans. For investors or lenders, bonds may also be beneficial. Unlike syndicated loans, investors can buy and sell bonds at any time before their maturity.
Syndicated loans come from a group of lenders, usually financial institutions, rather than a single financier. On the other hand, bonds are debt instruments issued by companies. Both of these are options for companies or other entities to generate finance for their projects. While both are types of debts, they are different from each other in various aspects.