The financial market has become increasingly competitive in recent years. As the demand for loans also increases, it becomes more difficult for community banks like yours to approve large loans while staying within your legal lending limits. Loan participation is an excellent way for your institution to approve large, profitable loans while staying within your legal lending limits, by teaming up with other banks to participate in the loan process.
What is a Participation Loan?
Participation loans are loans made by multiple lenders, banks, or financial institutions to fund a single loan. The “lead bank” actually loans out a large amount to its customer or borrower, and then recruits other banks to “participate” and chip into the loan amount while sharing the risks and profits amongst themselves.
Benefits of Loan Participation
Buying and Selling Participations
Beyond the ability to approve loans you couldn’t otherwise, one of the biggest advantages of buying participation loans is diversifying your institution’s portfolio. During periods in which your bank has large volumes of deposits but less demand for loans, you can loan out your deposits to banks outside their area. Similarly, selling participation will let your banks consistently meet the credit needs of customers, regardless of the amount or your legal lending limit.
Loan participation is also a great way for your lenders to divide risks. Since each loan provider offers a small portion of the loan, in case the borrower defaults or there is an economic recession, the loss gets divided into very small portions, and no one institution faces the potential loss alone.
It’s not only risks that are divided. After all, why would any financial institution agree to share risks and losses if they do not have anything to gain in return? Loan participation also allows all the lenders to share profits, which works well for many smaller institutions. Teaming up with a profitable “lead bank” will help other community banks with less loan demand generate more income. The terms and conditions of the loan participation are established in a written agreement for all participating banks to sign.
The lead lender in a participation always gets to manage the borrower or customer relationship, which improves their creditability. Keeping that relationship in-house, rather than having to refer the customer to a larger bank with a higher legal lending limit, allows the lead bank to build long-term customer loyalty and defend against big-bank competitors.
Loan participation is an important tool to drive profit in today’s lending environment. It helps you build better customer relationships and serve your community. The vast loan participation network at Independent Correspondent Bankers’ Bank, Inc., can help you provide large amounts of loans to your valuable customer without exceeding your legal lending limit. For more information on how to expand your lending capabilities, contact us today.