Loan Participation vs. Syndication: What's the Difference

  • April 29, 2021

Understanding the difference between loan participation vs. syndication is critically important when fulfilling your borrowing needs. Lenders seeking to generate new avenues of income or meet the local community’s borrowing needs should begin by examining each process. By immersing yourself in the details of loan participation programs and loan syndication programs, you can find a solution that aligns with your needs.

Here is what to understand about loan participation vs. loan syndication, with a special focus on the importance of loan participation programs to the modern financial marketplace.

Loan Participation vs. Syndication: What to Know

What is Loan Participation?

Loan participation entails a lender selling portions of an outstanding loan to buyers who may subsequently collect interest and principal payments from that loan. Most loan participation occurs between two or more financial institutions, allowing multiple banks or credit unions to effectively share ownership (and collectively reap the dividends of) any given loan. Loan participation programs can allow all lending participants to share the risks associated with the loan equally, or they can be structured on a senior/subordinate basis to differentially distribute both the risks and rewards associated with the loan to the various lenders managing it.

Banks aren’t the only ones who partake in loan participation programs; credit union service organizations or CUSOs frequently band together to share the ownership of loans in as efficient a manner as possible. A credit union may use a CUSO to engage in loan participation to avoid exceeding regulatory limitations placed upon it by laws such as the Credit Union Membership Access Act. Alternatively, a credit union that holds a risky loan may sell portions of that loan to a CUSO to minimize its exposure to financial risks.

What is Loan Syndication?

Loan syndication entails multiple lenders coming together to fund a large loan for a single borrower. If a would-be borrower needs access to a huge sum of money that an individual lender may not be able to provide by itself, loan syndication can be formed to meet the demand for a hefty loan by pooling the resources of multiple lenders together. Thus, loan syndication allows lenders to collectively issue a massive loan to a needy borrower without individually exposing themselves to the risk of that borrower defaulting on a particularly large loan.

Loan syndications are incredibly important when it comes to financing immense projects that no individual lender may view as safe enough to finance by themselves. It allows bold marketplace actors to embark upon lengthy, risky projects that would likely never materialize if they had to rely on a single cautious lender. If an important client has credit needs that surpass a lender’s established credit exposure limits, loan syndication can allow a bank or CUSO to partially participate in the loan with limited exposure to risks.

Differences Between Loan Participation vs. Syndication

The most critical difference between loan participation vs. syndication is that all lenders partaking in loan syndication will both be involved in the origination and servicing of a loan. On the other hand, in a loan participation program, not all lenders involved will have joint involvement in the origination and servicing of a loan. Many loan participation programs involve an original (or senior) lender who holds onto the original loan documentation and services the loan, while also including a secondary (or subordinate) lender who holds a smaller portion of the loan and is only paid if there are enough funds remaining after the senior lender is paid.

Borrowers themselves may not even know their loan has been participated out by the original lender. In a loan syndicate, however, borrowers will understand from the start that their loan is being sourced from multiple different lenders at once to mitigate financial risks associated with defaulting on a loan. The significant difference between loan participation vs. syndication is thus the role of the lenders themselves. According to the Credit Union Times, CUSOs now play a more important role in loan participation than they did just a few years ago due to heightened demand.

Loan Participation vs. Syndication: Which is Best For Me?

Loan syndication is preferable in expensive cases that may require multiple lenders to finance a single borrower’s loan. Loan participation programs, on the other hand, allow banks and credit unions to mitigate their exposure to risks by distributing portions of their existing loans out to other lenders. Contacting the experts at Extensia Financial can help connect commercial real estate brokers with credit unions interested in participating in lending programs.

The financial professionals at Extensia can explain the fine differences between loan participation vs. syndication while also illustrating which option is the most reliable for any given commercial scenario.