Split Contract Lending: Everything You Need to Know
Split contract lending is a type of lending arrangement where two lenders share the financing of a project or property. This type of lending has become increasingly popular in recent years due to its ability to spread risk among multiple lenders while still allowing borrowers to secure financing.
Here`s everything you need to know about split contract lending.
How it Works
Split contract lending involves two separate contracts, each with a different lender. The first contract, known as the senior loan, covers a large portion of the financing, typically around 75-80% of the total loan amount. The second contract, known as the subordinated loan, covers the remaining financing, usually around 20-25% of the total loan amount.
The senior loan is typically provided by a traditional bank or other financial institution, while the subordinated loan is provided by a private lender or other non-bank entity.
Benefits for Borrowers
Split contract lending offers several benefits for borrowers. First, it allows borrowers to secure financing even if a traditional bank is not willing to provide the full amount. The subordinated loan fills in the gap, making it possible for the borrower to complete the project or purchase the property.
Second, split contract lending can be a way to secure more favorable terms than would otherwise be possible. By spreading the risk among multiple lenders, the borrower may be able to secure lower interest rates and more flexible repayment terms.
Benefits for Lenders
Split contract lending is also attractive to lenders. By sharing the financing, lenders can spread their risk and reduce their exposure to any one borrower or project. Additionally, lenders may be able to offer more favorable terms by working together with other lenders.
Challenges
While split contract lending offers several benefits, it also comes with some challenges. One of the biggest challenges is finding two lenders who are willing to work together and agree on the terms of the split contract.
Additionally, split contract lending may be more expensive for borrowers due to the fees and interest rates charged by two separate lenders. Borrowers should carefully consider the costs before deciding on this type of financing.
Conclusion
Split contract lending can be a useful financing tool for borrowers who are unable to secure the full amount from a traditional bank or who want to secure more favorable terms. However, it also comes with some challenges, including higher costs and the difficulty of finding two lenders who are willing to work together.
As with any financial decision, borrowers should carefully consider their options and consult with a reputable lender and financial advisor before choosing split contract lending or any other type of financing.