A syndicated loan is one of the numerous funding options available for startups and funding is an important factor for running a startup, as funds are needed to help finance startup operations.
Syndicated loans are pulled together by a group of lenders providing a larger capital that otherwise would be high risk for a single lender. This loan type has complex structures that should be considered carefully.
There are both benefits and pitfalls for syndicated loans. Therefore, startups exploring this funding option should do so with financial guides from experts who clearly understand and explain the terms and conditions for getting the loan.
Some of the pitfalls of a syndicated loan for startups include but are not limited to the following:
Higher Costs and complexity
Startups should understand that syndicated loans have higher interest rates and take a lot to be serviced. It also involves a lot of intricate paperwork that needs careful evaluation by experts.
Rigid repayment terms
The payment plans for syndicated loans are not flexible, so there are no considerations if the startup revenue projections fail to pull through. It is required they follow the laid down terms in the book.
Credit and reputation risk
Credit risk is a risk all the parties involved in a syndicated loan take, the use of collaterals could help minimize this risk.
For a startup, syndicated loans pose a reputation risk. It gives off a notion of not being good enough to secure funding and this can affect it in the long run.
However, if you believe your startup is worth it and deserves a shot at all costs, syndicated loans are still a very viable option. Here are some benefits you stand to enjoy.
Bigger Capital
Because this syndicated loan is a pool of resources, the capital generated is bigger than what a single investor can pull off comfortably and with more funds, there are more opportunities to explore growth paths for the startup.
Stability and Diversified risk
The syndicated loans have more stability, unlike the other funding options. The startup is less likely to run into the risk of default, as can happen when a sole investor is financing and has financial difficulties. In syndicated loans, if this occurs, the rest continues to fund the startup and the damage is minimized.
Creditworthy profile
As a startup accessing syndicated funds and following the repayments plan strictly can improve your reputation as a startup that is creditworthy, and this can come in handy when sourcing for future funds.
Bottomline
Syndicated loans give access to a network of diverse experts, who have resources, experience, and contacts that can help a startup.
This means a bigger support community and can go a long way to ensuring a startup’s success.
So when deciding whether to go for syndicated loans or not, consider the pitfalls and benefits, see if it still serves the purpose you have in mind, and consider your business goals as well as your financial projections and how well you have performed so far and also the startup’s risk tolerance.
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