If you have a large enough bank transaction, such as $15 million or more, you may think you are done when you have one bank that has given you a term sheet which you agree to.

There may be another step.  If the deal is large enough, the lead bank may find a second bank or multiple banks to take part in the credit.  The lead bank may still be the one you deal with day to day.  However, before the deal gets done, the other bank(s) have to agree to the credit and the terms.  The lead bank in other words, is syndicating part of the deal to another bank.

It could be a good thing.  The other bank may bring in additional services or talent that the first bank does not have.  For example, maybe the lead bank does not offer as much in treasury services.  The second bank might be the one where you end up having your deposit, lockbox and other accounts.

The second bank may have other talents that the lead bank does not have.  They have more experience in the industry.  They may have branches and connections in other markets, including international, where the lead bank does not.

Why do banks syndicate?  One reason is to share the risk.  Another is to bring in more capital, which allows them to spread the capital they have to more deals.  A third reason can be give and take.  Syndication can be two ways.  I will let you have a piece of this deal and you will let me have a piece of one of yours.  We both get to hedge our risks without the time and management drain of always being the lead bank.

As a client, there are risks with syndication.  It usually can mean another set of questions during the due diligence process.  It can be additional documents you have to sign at closing.  There is another bank that you have to report to.

Perhaps even more significant is the credit risk.  Something could happen at the second bank.  They may decide not to renew when your loan comes up.  Or you may trip a covenant and the second bank may hold a hard line and not be as flexible.

So what do you do when looking for a bank loan?  First, know the legal lending limit and the effective lending limit of the bank.  A bank could have a legal limit of $40MM, but decide that they will only go up to $15MM.  Second, as you get deeper into discussions about their term sheet, ask them if they intend to syndicate part of the loan and if so, how much and to whom.  It should be out in the open.

Syndication has its benefits but as in most things, there is a corresponding risk.  Ask and know what you are getting into.  It is not a bad thing and can help a deal get done that might not otherwise take place, especially in tight markets.

Also realize the market may be shrinking.  I heard a talk where someone said that 57 is now 13.  In other words, the number of banks has fallen dramatically, so there are fewer avenues to syndicate.  It is an interesting dynamic.  On the one hand, banks may be working together on one deal.  But on another deal, they could be competing against each other.  As a result, banks will tend to be selective who they syndicate to.