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Understanding Syndicated Loans

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When managing a growing business, understanding how to handle financing and investment can be challenging. Syndicated loans are a great option to scale up your enterprise with the need for additional capital. Companies can access larger sums of money; even goals previously considered unattainable are within reach. 

Let’s explore synergistic strategies from major intermediaries as well as the value of risk analysis, so your business can make smart decisions whenever it needs capital for expansion plans.

What is Syndicated Loan Financing?

A syndicated loan is a very popular financing tool for large companies that need to borrow a significant amount of money. It involves banks or other financial institutions teaming up, or syndicating, to offer high-value loans. 

These loans come with advantages such as lower interest rates and fees than if the business had approached one lender alone. By borrowing with a syndicated loan, businesses can also benefit from the collective expertise of multiple lenders who better understand their industry and finances. 

This type of loan is commonly used by corporations looking to strengthen their ties with organizations they trust and can collaborate on investment strategies together.

How Syndicated Loans Works

Syndicated loans allow large organizations to access capital and longer repayment terms, usually by issuing bonds or shares of stock. The syndicate is managed by one or more lead banks, and each institution involved in the financing puts up an amount they are comfortable with. 

Each lender will typically be repaid based on their percentage in the syndicate when the loan is repaid. The unique thing about syndicated loans is that all lenders are then able to manage their individual risks collectively rather than having each lender take on the entire risk alone. 

This makes it easier for the borrower to receive a larger loan with more favorable rates from the lenders involved. Syndicated lending also enables banks to make multi-million-dollar investments without taking too much of a risk or becoming over-concentrated in one particular sector. 

This model of pooling investor assets works great when arranging large loans, as it allows investors to benefit from economies of scale while still minimizing individual risks.

 

Syndicated Loan Process

The syndicated loan process is utilized by banks when a large amount of financing is needed. Essentially, multiple lenders from separate financial institutions pool their resources together to provide a borrower with the capital they require.

An agent bank acts as an intermediary for the grouping of lenders. This simplifies the syndication process and makes it more organized by allowing communication and decisions to funnel through one entity as opposed to several at once. It is important to note that from the outset, individual identity and roles within the syndication must be clearly defined to ensure that all involved parties are on the same page throughout the entire process.

 

What are the types of syndicated loans?

Syndicated loans are an attractive option for those looking for financing that can grow and change over time. Syndicated loans come in numerous forms, each with its own quirks and features tailored to the needs of various businesses.

 

1. Underwritten Deal

It is a type of syndicated loan agreement in which multiple financial institutions are involved, and each institution agrees to provide financing to the borrower. These loans provide borrowers access to more capital than would otherwise be possible with a single lender and function as a way for businesses and organizations to access substantial amounts of money quickly.

They also provide more security for lenders than other financing options since numerous entities share any associated risk. Despite this, syndicated loans can require more time and paperwork than alternative options, so those looking for financing should choose the option best suited to their situation.

 

2. Club Deal

A syndicated loan Club Deal is a financial agreement between a number of banks that allows them to provide a large loan to an entity jointly. These loans can range in size but often consist of extremely large amounts of money with terms up to 10 years or longer. 

Club deals have become more popular over time due to the increased complexity and size of some business transactions such as mergers and acquisitions. By pooling funds together, the risk associated with these transactions is spread across multiple entities while all parties involved are able to share the benefits collectively. 

Additionally, it ensures that multiple institutions are offered an opportunity to partake in lucrative deals even if they can’t fund them on their own. This type of structure has allowed many successful businesses around the world to expand and carve out their success in competitive markets.

 

3. Best-Efforts Syndication Deal

It is an agreement in which an investment bank issues and sells securities on behalf of the issuer. They target qualified institutional buyers (QIBs) and put their best efforts into marketing the security. The deal allows for the issuing company to get immediate access to capital by leveraging their balance sheets. This type of transaction is a more efficient way of financing than seeking individual equity investors or taking out a loan. 

 

Who Can Avail Syndicated Loan?

Anyone in need of financing, including companies, governments, and other organizations, can avail of a syndicated loan depending on their creditworthiness. 

The lenders provide the capital, while the borrower has to provide agreed-upon collateral in exchange for the loan. 

While the amount, interest rate, and duration of the loan syndications depend on individual negotiations, typically multiple lenders will share the risk among themselves to make sure that the mutually agreed upon obligations are fulfilled. 

Why do banks prefer syndicated lending?

Syndicated lending contracts represent a practical solution for banks when faced with loans that are simply too large to fund on their own. Depending on the loan size, several banks can come together to share the risk of default while also pooling resources to reduce their individual costs. 

They also offer access to a larger capital base which results in better interest rates and longer repayment periods. Banks are thus able to make more profitable investments with greater flexibility, allowing them to capitalize on any opportunities that arrest their attention along the way.

Enhance Your Banking Operation with Banking Tools

Every banking operation needs the advantage of time-saving tools and solutions to help it move faster and smoother. Utilizing the right tools enhances an operation quicker than before and helps increase efficiency and accuracy throughout the entire process. 

By investing in tools like automated tracking or scanning solutions, your staff can save money by reducing labor costs associated with manual operations. 

Not only that, but customers are likely to appreciate having access to self-reporting solutions for their accounts. Investing in technology will ultimately enhance your banking operations as you can more effectively keep up with customer service demands while maintaining accurate records an

d data. 

Looking For Innovative Tools for Your Bank?  BankLabs Is Here!

Is your bank planning to venture Into syndicated loans? If yes, then BankLabs is all you need, It is no secret that technology plays a huge role in making sure your banking needs are met. From mobile banking to setting up payment plans, a wide range of tools can help you manage your finances and ensure your financial goals become reality.

BankLabs was founded with a focus on driving innovation into the banking industry. We recognized that traditional methods such as spreadsheets were no longer enough and sought to harness revolutionary programming techniques to propel an ever-modernizing world forward. 

Our mission is simple: we want financial institutions across the globe to be successful in serving their local communities, forging strong connections between banks and customers alike along our journey! Contact us now to learn more!

 

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Important Process of Loan Syndication

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The process of loan syndication can be a bit daunting, but it’s important to understand how it works in order to get the best possible financing for your project.

In a nutshell, loan syndication is when multiple lenders come together to provide funding for a single loan. This allows for greater flexibility and more favorable terms than if you were to secure financing from just one lender.

Here’s a closer look at how loan syndication works and what you need to know about the process respectively:

3 Phases of Loan Syndication

1. Pre-Mandate Phase

The pre-mandate phase is a crucial part of the loan syndication process, as it determines many parameters that impact both lenders and borrowers. Loan syndication typically begins with an initial assessment of the borrower’s needs and financial history. This includes the necessary requirement or the documents that the borrower has to present to the bank or any financial institution. These may include loan syndication contracts, loan credit information

Once this assessment is complete, a market-sounding phase can be conducted in order to identify potential lenders and assess the capital requirements for the loan. All this groundwork sets up the next stage of the process so all those involved can move quickly during later negotiations on the loan mandate.

2. Intermediary Phase

The intermediary phase of loan syndication is a crucial part of ensuring smooth loan origination and processing. During this stage, an intermediary financial institution takes the lead in overseeing the coordination of all parties throughout the entire process.

It includes the lenders, borrowers, attorneys, and other financial institutions involved. Primarily, their primary task is to ensure that clear communications are taking place between all parties and that all regulatory requirements are met informally so as not to cause any disruption to the loan syndication process.

Ultimately, the intermediary phase bridges the gap between initial negotiation meetings and to successful completion of the loan. It is an essential component for the seamless dispersal of funds from multiple financiers and ensuring everyone remains in line with local legal regulations.

3. Post-Closure Phase

The post-closure phase of loan syndication is a crucial period that requires the financial institution and other involved parties to maintain close communication. Once the funding process has been completed, account managers will typically maintain contact with borrowers and lenders, ensuring both sides stay abreast of upcoming repayment schedules and loan performance reviews.

Understanding the conditions of each syndicated loan agreement, interest rates, and satisfying all terms are essential during this stage, as any missed deadlines can quickly lead to default. To help protect against this eventuality, borrowers should monitor their payments closely in order to ensure that all expectations outlined by their lender group have been fulfilled.

This would enable them to identify any potential issues or discrepancies at an early stage and take steps to avoid defaulting on the loan. By following this approach, the post-closure phase of loan syndication can remain free from any costly pitfalls.

 

How to Choose the Best Digital Banking Platform to Help You With Syndicated Loan Process?

With so many digital banking platforms on the market, it can be tough to know which one is right for your needs. However, by taking the time to assess your options and understand what each platform offers, you can make an informed decision about which digital banking platform will best suit your needs. Here are a few factors to consider when choosing a digital banking platform.

When it comes to syndicated loans, it is very important to have a reliable tool or solution to improve the syndication process.

Here are the best pointers on how to find the best  banking solution: 

Research the different digital banking platforms available

It has never been easier to conduct financial transactions with digital banking platforms. From checking balances to making deposits and transferring funds, there are a variety of easy-to-use options available online. 

Additionally, many banks offer complimentary mobile applications which can provide additional access and convenience when conducting transactions. Taking time to research the different digital banking platforms available can be beneficial in choosing one that fits your lifestyle and meets your expectations.

Researching different digital banking platforms can help you select the one that works best for your particular needs.

Consider what features are most important to you

Banking solutions for banks are critical for a successful modern business. From secure digital transactions to comprehensive financial tracking, high-quality solutions provide the necessary platform for handling customer accounts and funds.

Banks often utilize features like automated payments and notifications, streamlined accounts, and the ability to deposit checks remotely to serve their customers better. Some banking solutions also feature fraud protection and analytics capabilities, which help banks recognize liabilities and quickly flag suspicious activity.

With such innovative tools, banks can ensure the security of their customers’ transactions while keeping pace with rapidly advancing technology.

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Look for user reviews and compare ratings

When choosing a banking solution, research can pay off. Taking the time to read user reviews and compare ratings of various programs can make all the difference. Doing so can provide useful insight into what features to expect, what other users think about the product or service, and how satisfied customers are with the vendor’s customer service.

This can be especially helpful when deciding between two similar options or if you have limited experience with either banking solution. A few extra minutes spent comparing and contrasting user reviews and ratings can bring peace of mind and an informed decision when it comes to selecting a banking solution.

Decide which platform is best for your needs

Choosing the right platform for your needs can be a daunting task. There is no one-size-fits-all solution, as everyone has different requirements and preferences. It is important to research all potential platforms thoroughly to ensure that they meet your criteria, such as features, functionalities, cost, and ease of use.

Moreover, make sure you understand how the platform can be integrated into your existing workflow and systems. Taking the time to assess the best fit for you will pay off in extended productivity and fewer technical issues down the line.

Create an account and start using it!

Banking digitally has many benefits and is becoming more popular as technology improves. When it comes to choosing the best digital banking solution for your bank, an essential factor to consider is customer service – you want the platform to offer options that make the end user’s experience fast, easy and secure. 

With so many options available, it can be difficult to choose the right digital banking platform for your needs.\You just have to search for the best and appropriate one. Once you’ve found the right one, creating an account is easy, and then you can start using all the great features it has to offer!

Looking for a great digital banking platform? BankLabs offers everything you need and more. Contact us today to learn more about our excellent banking solutions.

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Diversifying Secondary Loan Participation

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By diversifying their portfolio, banks are better positioned to protect themselves from the risk associated with concentrated industries.

Syndication

Syndication of secondary loan participation is a form of loan financing that allows multiple lenders to participate in a single transaction. This arrangement helps banks and other institutions access large amounts of capital, often in ways they couldn’t have done on their own. It also helps companies engage in transactions that are not possible through conventional lending channels, such as mergers and acquisitions.

In syndicated lending, all lenders sign the same loan agreement and their liability is limited to their share of the loan’s interest. In addition, most loan terms are uniform, although collateral assignments are typically assigned to different assets. This arrangement allows individual lenders to provide large loans while still retaining a prudent level of credit exposure.

A syndication contract consists of a series of commitment contracts. Each participant makes an initial commitment to fund an installment of the loan and subsequently makes a commitment. These commitments are known as tranches, and each tranche represents a specified portion of the total loan. During the term of the contract, each participant fulfills its commitment.

The syndicated loan market has developed rapidly in recent years, attracting new institutional investors. This has led to a surge in the volume of loans traded in the secondary market. As a result, it has become one of the most innovative forms of capital markets today. And it continues to grow, with the volume of loans traded annually reaching $743 billion. The demand for secondary loans is expected to grow even more, and new lenders will continue to emerge to fill the gap.

A syndication contract can contain as many or as few tranches as required. Each tranche will have a borrowing customer and a group of participants, some of which will be common, while others may be unique. Each tranche is under a commitment contract that outlines the ratio of participation among participants.

Loan participation

Secondary loan participation offers financial institutions a way to increase loan volume, diversify risk, and enhance earnings. However, it is imperative to follow due diligence procedures and maintain active oversight throughout the life of the loan. It is also important to sign a comprehensive participation agreement to minimize any potential risks and ensure the success of the loan.

The main characteristic of loan participation is that the ownership interest is transferred to multiple entities, including several banks. One of the participating banks, called the lead bank, retains a partial interest in the loan and holds the loan documentation in its name. This bank then deals directly with the customer. Although the participants may believe that the lead bank has the primary responsibility of credit risk management and underwriting, regulators require each participating bank to have a robust risk management program.

Secondary loan participation is a common practice in the secondary loan market. It is a method of selling loans, where one bank purchases another’s interest in a loan. The participating banks then share the risk. The lead bank originates the loan and closes it, while the other banks purchase ownership interests. This arrangement helps all participants share in the credit risk, while preserving the anonymity of the lead bank.

Loan syndication has become an increasingly popular method of financing for commercial real estate. It allows lenders to diversify their revenue streams and enter new markets. It also helps them manage risk and reduce capital weight. It also provides lenders with an opportunity to offer financial accommodations to valued clients. Additionally, it permits lenders to engage in transactions that might otherwise be prohibited by lending policies.

Loan portfolio sale

A Secondary loan participation portfolio sale involves selling a portfolio of loans. These portfolios are typically made up of various types of loans as well as equity and hedging assets. This Practice Note outlines the parties involved, the likely motivations for making such a transaction, and the typical process involved.

A loan portfolio sale is a process in which multiple loan assets are sold to another investor. These sales are typically conducted for similar reasons as a single asset debt trade. The seller may wish to sell some or all of their assets, and in both cases, the transaction is documented through a bespoke sale and purchase agreements that borrow some of the characteristics of LMA secondary trading documentation.

The Secondary loan participation market is relatively new. Before the creation of this type of transaction, bank loans were considered nonmarketable securities and could only be sold as contingent liabilities. The current secondary loan participation market has created a new business model for removing these nonmarketable assets from a bank’s balance sheet.

A secondary loan participation portfolio sale is an important step for financial institutions looking to reduce their loan risk exposure and improve their profitability. It allows institutions to diversify their loan portfolios and gain access to a new segment of the lending market. Moreover, participating in loan transactions also allows for additional income streams, such as gains on sale and servicing income.

Security interest

Security interest in secondary loan participation agreements differs from traditional securities in several ways. In most cases, they do not confer an ownership interest to the participant. In addition, they do not create a lien on the underlying loan. However, in some cases, participation in secondary loan markets does confer an ownership interest.

As the syndicated loan market has grown in the past few years, the increased presence of secondary market transactions has caused concerns about the status of syndicated loans. 

In the secondary loan market, participations are a common tool for lenders to use to facilitate lending and manage risk. These agreements are commonly used by banks and independent finance companies. 

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What is a Loan Syndication?

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Loan syndication is an alternative loan arrangement in which the lenders pool their loan portfolios into one large loan. These lenders share the risk and rewards of the loan. This structure helps individual lenders provide large loans while limiting their credit exposure. Individual lenders are still involved in the syndicated loan process, but the loans are generally much larger than they would be if they were lending on their own.

Syndication

Syndication of loans is a type of loan where two or more lenders come together to make a loan for a single borrower. This allows the lenders to share the risk and the loan amount. The process allows for large loan amounts while maintaining prudent credit exposure. It is often used in small-business financing.

The retail market for syndicated loans is dominated by banks, finance companies, and institutional investors. Compared to Europe, the balance of power between these groups is different in the U.S. Syndicated loans are heavily dependent on credit quality and institutional investor appetite. Banks continue to dominate the market, though institutions have become significant players over the last decade.

The loan syndication process is generally structured in three phases. First, the borrower submits a loan request to a lead bank, which then seeks out other financial institutions to participate in the loan syndication process. Throughout the process, the lead institution conducts an appraisal of the loan application and develops a credit proposal for the borrower.

Syndicated loans are large loans made to borrowers by several banks. Typically, one bank is the lead bank, which takes a percentage of the loan and syndicates the rest to other banks. These loans are similar to participation loans, except they involve more than two banks.

Syndicated loans

Syndicated loans are loans arranged and structured by a group of lenders. A lead arranger is responsible for administering the loan. These lenders provide the money to the borrower. There are many types of syndicated loans. The main difference between a syndicated loan and a traditional bank loan is its structure.

Syndicated loans are structured as credit lines or as fixed amounts. Their interest rates are fixed or tied to an industry standard. This type of loan is a good choice for large borrowers who need large amounts of money for projects or mergers. Syndicated loans also help large borrowers maintain a positive market image. This helps the borrowers improve their credit scores, which means they can access larger amounts of credit in the future.

Syndicated loans are made between different financial institutions, and lenders can take an interest in one or both tranches. The lenders of syndicated loans get to know each other and become more familiar with each other’s business. This gives borrowers a larger pool of lenders to choose from. These lenders will work with the borrower to negotiate the terms of the loan.

A lead bank acts as an agent between the lender and the borrower. It holds the authority to oversee the loan and communicate with all the lenders. It also has responsibilities for managing the loan, including ensuring compliance with contractual obligations and overseeing any breach of contract.

Syndication agreement

A syndication agreement for loan syndication is an agreement that binds all parties to share the risk and rewards associated with loan syndication. These agreements are typically negotiated through a syndication process, in which the lead bank identifies participants who pool their funds to provide funds for a borrower’s loan application. Once the loan is approved, the lead bank disburses the loan, sharing the proceeds of the loan with the participants in a set ratio.

Syndicated loans are designed to reduce the risk associated with lending, spreading it among several institutional investors and financial institutions. This reduces the risk associated with default and allows for more favorable lending terms. While there are many advantages to loan syndication, there are several aspects to be considered before entering into a syndicated agreement.

First, a loan syndication agreement must specify the terms and conditions for each party. In some cases, this can be complicated. It may include market-flex contractual language, allowing for shifts in pricing depending on investor demand. This type of language is now standard in syndicated loan commitment letters.

Syndication banks

Syndications are often used for large loans, and the banks that participate in them can share the risks. The banks in the syndicate are each responsible for a certain portion of the loan, and they can all manage the loan from a single point of contact. Syndications can also benefit the borrower by reducing the amount of paperwork and time spent on negotiations.

The loan agreement in a syndicated loan facility is for a single loan, with each lender having a fixed amount of liability, typically a portion of the loan interest. While the loan agreement terms are typically uniform across the lenders, collateral requirements may differ. The main purpose of a syndicated bank facility is to spread the risk of default among a number of lenders, allowing individual lenders to provide large loans while maintaining manageable credit exposure. Syndicated loans are commonly used to fund mergers and acquisitions, large corporate takeovers, and capital expenditure projects.

Syndication loans are a type of private lending that combines various types of loans and other types of lending. Syndications are created when several lenders pool their funds to provide financing for a specific project. Each participant contributes a percentage of the total loan amount, assuming the risk of the entire loan. The lenders work together to reach an agreement on the repayment terms of the loan.

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Broadly Syndicated Loans

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Generally, broadly syndicated loans have more lenient covenants than other types of loans. For example, eighty percent of broadly syndicated loans are “saratoga” loans, which do not impose minimum annual cash flow requirements. This reflects more lenient market conditions than traditional loans, which often require a minimum cash flow requirement.

Leveraged loans

Leveraged loans are broadly syndicated debt instruments issued by financial institutions to non-investment grade companies. These loans can be used for general corporate purposes, such as refinancing existing debt, recapitalization, and leveraged buyouts. Leveraged loans have several advantages over non-leveraged loans.

The total leveraged loan market is just under $2 trillion, with $1.3 trillion of that total held by institutional lenders. Leverage levels are steadily creeping higher. Most leveraged transactions have a total leverage of 5.5 times, with 4.6 times coming from first lien loans. This level has continued to increase in recent years, and the highest twenty percent of leveraged borrowers have leverages of at least 6.25 times.

Leveraged loans have several risks associated with them. For one, covenant-lite loans lack an early warning mechanism and prevent lenders from re-assessing loans before they default. Another risk associated with these loans is regulatory capital arbitrage. This practice allows institutions to manipulate risk by lowering their capital requirements. Furthermore, increased competition among ratings agencies creates rating shopping and raises questions about the accuracy of leveraged loan ratings. As a result, it is hard to assess the health of the leveraged loan market.

Leveraged loans have been growing steadily since their inception. Today, they constitute a large portion of the loan market, with the total size of leveraged loans exceeding $1tn. As a result, they are a significant contributor to the funding needs of private companies.

Syndicated loans typically involve large sums of money and are offered by multiple financial institutions, thereby spreading the risk of default among several financial institutions. In addition, syndicated loans often have a lead bank that puts up a larger share of the loan and performs administrative tasks. These administrative tasks can take up a large portion of staff time, and most lead banks invest in loan administration software to help ease the workload and increase accuracy.

Free-and-clear tranches

Free-and-clear tranches are a relatively new innovation in broadly syndicated loans. They emerged from the proliferation of covenant-lite loans in the market. Lenders expect their use of free-and-clear tranches to fluctuate with market conditions.

CLOs

CLOs, or collateralized loan obligations, are complex structures that combine several elements in order to provide investors with an above-average return on investment. These instruments are made up of several tranches of underlying loans, which are then ranked according to risk. Though some CLO tranches are leveraged and below investment grade, most are rated investment grade and benefit from diversification, credit enhancement, and subordination of cash flows.

The risk associated with CLOs increases as they become larger and represent a higher percentage of the total debt structure. For instance, $10 million of senior secured loans is more likely to be fully covered in bankruptcy than $90 million. Another factor is the industry segment in which the CLO is issued. Some industries go in and out of favor, while others remain highly desirable.

Broadly syndicated loans are generally backed by cash flows and are typically used to finance acquisitions, mergers, and recapitalizations. They are among the most common leveraged bank loans, and are also the most common type of collateralized loan obligation. The market for these instruments is dominated by banks, securities firms, and institutional investors.

Fees associated with CLOs vary. While most lenders receive a percentage of the final allocation, some pay a fixed upfront fee. Typically, this fee is between 12.5 bps and 25 bps. However, this fee can be tied to the commitment of the investor.

A key part of CLO management is overseeing cash flows. This is important because the cash flows of CLOs are distributed through a multi-tranche structure. Each tranche has its own unique set of covenants that require the manager to monitor and test the performance of the portfolio monthly. Using these covenants, the manager can adjust the portfolio as the market changes.

Revolver

Revolver broadly syndicated loans are a type of secured loan that a borrower may take out to fund a business operation. These loans are secured by the company’s assets, such as accounts receivable and inventory. Typically, the borrower takes out a 1st lien on the asset used to calculate the amount of the loan, and can also include other assets as collateral.

These loans are structured to allow borrowers to draw down on the credit line, repay it, and then draw more money off the line. The borrower is then charged an annual fee for any unused amounts. Revolver broadly syndicated loans are most commonly offered to institutional investors, such as pension funds, mutual funds, insurance companies, and hedge funds.

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Profit Participation Loan

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A profit participation loan is a form of debt instrument between two group companies. These loans receive tax treatment similar to those provided to dividend distributions between group companies. This new tax treatment eliminates any potential controversy about whether or not such a loan satisfies the Arm’s Length Principle. Furthermore, the new tax treatment should extend to interest income, expenses and secondary adjustments.

Subordinated loans

Subordinated loans and profit participation loans should be carefully scrutinized before investors invest their hard-earned money. The new Retail Investors Protection Act (RIPA) will introduce a prospectus requirement for these types of investments to ensure a minimum standard of transparency. Prospectuses are lengthy documents that contain detailed information and financial figures. They also provide information on risks and investment terms.

The risk to an investor of a subordinated loan is greater than for a regular bank loan. In the event of the company going bankrupt, the investor’s claim will rank above all other creditors and shareholders. While this might sound attractive, it is essential to understand how it works and how it will affect your investment.

Profit participation loans are a type of quasi-equity investment. They present a higher risk than ordinary capital, but are lower risk than senior debt. They can be in the form of a loan, securities representing debt, or even the outstanding amount of the loan. Profit participation loans are also used to finance marketing campaigns for pet food, events, and other types of businesses.

Loan syndications are a growing trend in commercial finance. They allow lenders to expand beyond traditional revenue streams and enter new and developing markets. They also help lenders diversify their portfolios while reducing their capital weight. Loan participations allow lenders to provide important financial accommodations to valued clients and to engage in transactions that might otherwise be impossible.

Profit participation loans

Profit participation loans are loans in which two or more lenders are equal partners in a project and each lender gets a proportionate share of the profits, above and beyond the amount borrowed for the project’s principle plus interest. Profit participation loans are not the only type of equity investments available to small businesses, though. Those who have an entrepreneurial spirit may be interested in this type of loan.

The prospectus requirement is intended to help investors evaluate the legitimacy of the investment and the chances of financial gain. It is also designed to protect investors from being swayed by unscrupulous individuals. It is a good idea to refrain from investing when you are uncertain about the company or individual behind an investment. You should also take the time to carefully examine the prospectus and any other contract documentation. The prospectus should contain information on the risks associated with the investment.

Profit participation loans are one of the most popular types of subordinated and equity investments available to online investors. They can be used to fund businesses in industries such as renewable energy, real estate, forestry, agriculture, pharmaceutical research, pet food, and marketing events. While there are risks associated with subordinated loans, the risks of profit participation loans are lower than those of ordinary capital.

Tax treatment

The tax treatment of profit participation loans depends on whether they qualify as equity or debt capital. Generally, loans that have repayment obligations are considered debts, but those with a fixed term of 50 years qualify as equity. This is because the interest payment on the loan is dependent on the borrower’s profits. 

Profit participation loans are an excellent way to balance a company’s equity,

BankLabs in the News: Arkansas tech firm has patent on helping banks share loan risks

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Article written by Steve Brawner at Talk Business and Politics September 28, 2022. Original post here.

A tech product patented by an Arkansas company is helping smaller community banks connect with each other to share the risks of larger loans.

Little Rock-based BankLabs holds the patent for Participate, which company leaders say makes the participation loan process more efficient and automated. The company last year received the only Arkansas-based patent for a loan participation automation product.

“A big part of what we’re doing is ‘democratize loan trading for all those banks that aren’t big,’ so it’s providing a level playing field for the Davids versus the Goliaths,” said Matt Johnner, the company’s Dallas-based president.

Johnner and Mike Montgomery, the company’s Little Rock-based CEO, said Participate allows smaller banks to engage in participation loans, where financial institutions share larger loans with other banks to reduce their risk. Banks have policies governing their lending activities, including a maximum loan amount, a limit on a particular client, and a limit on the percentage of loans in a particular sector such as construction. The originating bank services the loan and has the relationship with the borrower, who typically doesn’t know about the arrangement.

The two said participation loans traditionally have been based on personal relationships within city limits. Smaller banks often don’t have tools, processes or skill sets to participate in certain loans. Transactions are often managed by spreadsheet, FedEx shipments, and back-and-forth attorney interactions.

Participate automates and removes frictions and can operate 24-7. It enables processes to be done digitally so loans can close in a couple of weeks. It automates what portion of the borrower’s payment goes to both the originating bank and the participating bank and tracks the balances. It handles electronic document management, workflow, e-signatures, integration of the participation agreements, and the legal agreements between the two banks. They said the processes eliminate the surprises that occur at the end of a loan. Banks can do smaller loans that weren’t efficient for them, and they can participate in bigger ones they couldn’t previously handle.

Montgomery said many rural banks have less than a 70% loan-to-deposit ratio, which is not an efficient way for banks to operate. Banks only make money when they are lending; deposits are a liability. Banks in markets without commercial borrowers are disadvantaged.

“I think that this makes it easier for the rural and community banks to compete with the great big guys,” he said. “I think they can maintain personal relationships in their markets. But they can kind of drink a little bit from the wealth generated in banks in more populous areas that have commercial real estate. They’d like to have some of that on their balance sheets and vice versa. The guys that are in mid-city would like to have some ag loans, and they don’t know a farmer on the earth.”

Montgomery said BankLabs’s target is to have a network of one or two originating banks in every state with 2-5 downstream banks. He believes the company can reach that goal in 2-3 years.

The company’s overall mission is to help the dwindling number of community-based financial institutions compete with bigger banks using technical products. It tries to find backroom or front-end processes where a technical solution can increase efficiency and add value. Then they can operate it or find a better parent and sell it.

“It’s kind of that kind of a cycle,” Montgomery said. “We’re looking for a problem, see if we can’t solve it, see if we can’t solve it with efficiency, and make sure it monetizes itself on our side or on the back side.”

BankLabs has 21 employees, with about 10 in Arkansas and the rest spread across the country. It expects to hire more as Participate grows in the market.

It was founded by Montgomery, an early player in the Arkansas financial technical services company Systematics that is now known as FIS. The company is now based in Florida but still has a strong Arkansas presence. He also helped start Pinnacle Bank and was an early investor in Delta Trust & Bank.

He said he started BankLabs in 2010 during the banking crisis after seeing how big banks were depressing prices by dumping giant pools of foreclosed assets on the market. At the same time, banks had stacks of folders in their offices. He saw that community banks could benefit if their processes were more automated.

Montgomery in 2015 believed the construction industry was poised for a comeback, so the company created Construct, which connects borrowers, builders and banks.

Construct went to commercial sale in January 2016. Johner said the product eventually grew to 150 customers and was helping manage $70 billion in construction loans associated with roughly 100,000 projects. The company sold the product line to Abrigo this year, sending 15 of its then 35 employees to Abrigo.

Construct started with two clients, one of them Southern Bancorp, an Arkansas-based community development financial institution serving underserved areas and clients.
It has 54 locations and is the only financial institution in seven of its markets and one of two in six of them.

John Olaimey, the company’s president and CEO, said the company was an investor in Construct and is using Participate now. He compared the process for creating new bank relationships through Participate with creating Facebook friends. Banks reach out to each other and get invited to follow. Messages can be sent to a group of banks. He said it has reduced paperwork, spreadsheets and shipping items back and forth. Thousand-page tax returns are being sent through a secure portal rather than an email.

“When two banks do a loan participation today, it’s somewhat clumsy and it also depends upon who you can get access to at what time,” he said. “Participate really allows you to do that when you’re ready to do it and really is all online. It’s all secure. I don’t have to call somebody and say, ‘Hey, can you get me this document? Can you get me that document?’”

Now that BankLabs has sold Construct, it will focus on its Participate product. The company was one of 10 selected for the most recent FIS Fintech Accelerator cohort. That program, which is done in concert with The Venture Center in Little Rock, connects promising financial technical services companies with financial institutions. Montgomery said the company’s involvement led to 70 demonstrations with FIS clients and a small investment by FIS.

He said the company has a couple of other new product ideas.

“We’re a solid company,” he said. “We’re self-sustaining. We’re reasonably well-capitalized. We just went through a full product life cycle where we provide jobs for people. I think this company can have a multi-decade run easily. We provided a 10 times return on invested capital, which is sort of a gold standard, quite frankly. And we’ve got lots of new product ideas and at least one new product that’s already coming out and starting to prove that it can operate efficiently.”

Press Release: Bankers Helping Bankers Announces Loan Participation Marketplace

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Bankers Helping Bankers Announces Loan Participation Marketplace

FOR IMMEDIATE RELEASE – August 24, 2022
AUSTIN, TEXAS – Today Bankers Helping Bankers (BHB) announced a partnership with BankLabs to add a white label loan participation marketplace to the platform.

Established by FedFis and the Independent Bankers Association of Texas (IBAT) in late 2021, BHB connects bankers nationwide so that they can identify solutions that drive earnings and diversify sources of income. Its mission is to elevate and unite community banks across the United States to compete with large, entrenched financial institutions.
The BHB loan marketplace will be powered by the BankLabs Participate product, the first patented end-to-end participation loan management tool for both originators and participants.  Participate is a single platform to manage all loan participations, existing or new, bought or sold. It allows originators and participants to digitize and share loan info, documents, and automate workflow. Participate can cut weeks off the traditionally slow origination process, giving banks the additional liquidity and flexibility needed to maximize profits.

“For BHB to fulfill its promise of helping banks drive earnings, we must give community banks every tool we can to address their challenges and opportunities.  As we got to know BankLabs Participate, it was clear that it would enable and empower lenders to say ‘yes,’ even when facing traditional concentration and lending limit roadblocks,” said Dave Mayo, Chief Executive Officer of FedFis.

“We are on a mission to democratize loan trading for all banks, not just those with capital market desks. With Participate, BHB member banks will be able to digitally manage their balance sheet, avoid lending limit and concentration risk, deploy excess liquidity, improve loan yield, and increase non-interest fee income. We could not have found a better partner in BHB.”, said Matt Johnner, President of BankLabs.

The BHB loan marketplace will launch in late 2022.

About BankLabs
BankLabs is a technology company that creates innovative products to help community oriented financial institutions succeed.  Products are designed to help banks move money, credits and payments more efficiently and profitably. To best serve the financial institution industry, we seek like-minded partners to collaborate on research and development and/or distribution. BankLabs created the #1 construction loan automation tool in the country and subsequently partnered with Abrigo to take the product to the next level. BankLabs is now revolutionizing the traditionally slow participation process with Participate, the first patented end-to-end loan participation management tool. Participate helps lenders digitize and share loan information, documents, balances and automate workflow. Using Participate, lenders can digitally manage their balance sheet, avoid lending limit and concentration risk, deploy excess liquidity, improve loan yield, and increase non-interest fee income. For more information visit www.banklabs.com.

About FedFis 
FedFis provides financial institutions fintech data analytics and a strategy system that tracks Financial, M&A, and Vendor data (including technology vendors) on every bank and credit union in the United States. FedFis is committed to “truth in banking”, by helping community bankers understand which products and services will best pair with their existing technology to drive the strategic outcomes for which they strive. They are first and foremost, a family business of precisionists. Fifth-generation bankers and technology experts with incredible depth and passion for the banking industry. For more information visit, www.fedfis.com.

About IBAT
Formed in 1974, the Independent Bankers Association of Texas (IBAT) represents Texas community banks. The Austin-based group is the largest state community banking organization in the nation, with membership comprised of more than 2,000 banks and branches in 700 Texas communities. Providing safe and responsible financial services to all Texas, IBAT member bank assets range in size from $27 million to $39 billion with combined assets statewide of nearly $256 billion. IBAT member banks are committed to supporting and investing in their local communities. For more information visit, ibat.org.

For more information or questions about this release, please contact Rachel Hernandez at rachel@fedfis.com or 512.284.4987 

People with spreadsheets

Faster Construction Loan Process = More Profit & Happier Borrowers

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How many spreadsheets does it take to process a new construction loan? Far too many. The old adage “if it ain’t broke, don’t fix it” comes to mind, but sometimes we don’t know something is broken until it’s fixed. As with everything in the modern world, processes are digitizing, especially for banks in a competitive market. Banks across the country are beginning to feel the strain of the inefficient “old way” of processing and maintaining loans and many are beginning to realize that a boost in efficiency would benefit the bank in multiple ways.

Borrower Experience

Keeping and maintaining great borrowers is one of the best ways to ensure your survival and profitability. As more and more financial institutions are getting acquired or changing hands, offering an exceptional borrower experience is becoming a top priority. What do borrowers want? Less hassle and what they want when they want from any device they prefer. Mobility and automation cut down on borrower effort and leave them with a pleasant experience rather than a headache. To ensure borrowers return to your bank it is key to focus on their experience.

Risk Management

The more real-time information your bank can have, the more protection you can provide to the bank and our shareholders. Having a digital system at your fingertips with text alerts and detailed audit trails can keep your staff better informed and protected than the manual, spreadsheet-based process. Real-time reporting and overfunding alerts help institutions identify and mitigate risk quickly before it becomes a problem.

Increase Draw Interest

Who couldn’t benefit from a decrease in cycle time? An increase in draw interest? If you could decrease cycle time and increase draw interest while increasing staff capacity, wouldn’t you? Banks are turning to technology to accomplish all of these goals. The more efficient your staff is, the more loans they can manage safely and comfortably, and that gain is passed on to the bank’s bottom line. Each day we save in the process is a big boost to draw interest. In these rate environments that are more important than ever.

Conclusion

The great digital change has finally made its way to banks of every size. It is no longer a “big bank” privilege. It is the responsibility of every bank. Even banks that are not intent on hyper-growth are realizing that to stay competitive and retain quality borrowers, they need to adapt and adopt new technologies. The good news is that technology solutions are getting easier and easier to implement. Gone are the days of the months-long implementation process. Today’s systems are mobile and cloud-based, meaning they can be accessed from anywhere, with no downloads and installations necessary. As technology advances these efficient systems will become a part of our everyday lives, in more corners and more sectors than ever. Consolidation and the threat from disruptive fintech lenders are here to stay.  We owe it to our shareholders to build modern, borrower-friendly efficient processes.

 

  • Matt Johnner, president of BankLabs and board member of Encore Bank.

 

Arkansas Business Article about BankLabs

Arkansas Business: ‘Friendly’ Fintech BankLabs Helps With Lending

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‘Friendly’ Fintech BankLabs Helps With Lending

by Sarah Campbell-Miller on July 26th 2021

 

BankLabs of Little Rock will graduate from this year’s FIS Fintech Accelerator in August as it adds employees and works on a new software product designed to automate agricultural lending for banks.

BankLabs was the only Arkansas company selected from 148 applicants across 31 countries to participate in the program, which is sponsored by financial technology giant FIS of Jacksonville, Florida, and the state of Arkansas and hosted by the Venture Center of Little Rock.

“We like to call ourselves friendly fintech. The reason we use that term is we’re helping banks around the country, regardless of size, defend against the disruptive fintechs,” Matt Johnner, BankLabs president and co-founder, told Arkansas Business. “We’re the friendly fintech that helps the banks deploy additional lending solutions, including some more forward-thinking things, like allowing different companies to make loans to each other, but still benefiting the bank.”

The company was founded in 2016 and employs about 30 people. It’s hiring another 16 over the next year, he said. “We are really at a point of acceleration, or a tipping point. We’ve signed over 130 banks in the first five years. We’ve now built a great foundation,” Johnner said. “And so now it’s time to go to the next level. We’d like to double our revenue in this coming year. And then double the year after that; we just closed our first outside funding round with some great individual investors.”

He declined to disclose the company’s annual revenue, but said it raised more than the $3 million it sought from the funding round. BankLabs isn’t profitable yet. It “could be profitable in less than one year, but that would sacrifice growth,” Johnner said. He added that he was not building the company to sell it.

Johnner said BankLabs aims to be a company that has a multi-product portfolio heavily focused on commercial lending and is profitable in the long run. “We will continue to evaluate opportunities. We have had some folks try to acquire us already, and we just determined it wasn’t the right time,” he said.

For now, BankLabs has two main products, Construct and Participate. The company’s new agricultural lending product is unnamed and in the “ideation phase,” Johnner said.

Construct is software that automates construction lending for lenders to make that process — traditionally accomplished with spreadsheets and other paper documents — more profitable and efficient. The automation also reduces risk by providing real-time alerts to lenders.

Participate is software that automates lending between lenders. For example, a small bank that has a loan limit of $6 million could use it to lend $15 million to a borrower, with the additional $9 million participation coming from a partner bank, Johnner said. The software “automates the whole digital lending flow and has a marketplace component to it, to find new partners if that bank doesn’t have enough partners already,” he said.

BankLabs’s goals include signing more banks up for its products and building out the network effect of Participate. “So, if you’re a bank in Arkansas and you have, let’s say, 10 or 15 loan participations on your balance sheet, you might also have 10 unique banks that have bought one or more of those from you,” Johnner said. “And so what we do is we try to leverage that network effect, … give free access to [the] 10 downstream banks. And then we lovingly land and expand and try to upsell them.”

In addition, BankLabs touts experience in banking and technology from both Johnner and its co-founder, Chairman and CEO Mike Montgomery.

Johnner was an oilfield engineer before he joined Perot Systems Corp., which is now Dell Information Services, in 1994. After that, he worked for numerous technology companies.

Johnner said Montgomery is a third-generation banker who has invested in more than 20 community banks around the country and serves on the board of Southern Bancorp in Arkadelphia. Montgomery was also an executive at Systematics Inc., the Arkansas-based predecessor of FIS. Johnner called his partner’s past experience “fintech 1.0.”

“We’re trying to help Arkansas expand its economy and bring high-paying jobs back to Arkansas, through what we would call fintech 2.0,” he said. “This is a great time of consolidation for banks. It’s a great threat to banks that don’t innovate. So we seek out and welcome banks that are looking for digital innovation and defense against the bad guys.”

 

 

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