Participatory loans are one of the most popular alternative financing mechanisms, especially for companies, startups and entrepreneurs who intend to tackle a new project. The truth is that they present a series of advantages in these cases.
Next, we show you the main characteristics of participatory loans so that you assess whether this financial instrument meets your needs and can help you obtain the necessary resources.
What is a participatory loan?
A participatory loan is a hybrid financing formula, since it has characteristics of the contribution of capital by an investor and long-term loans.
They are regulated in the Article 20 of Royal Decree-Law 7/1996, which indicates that they are considered equity for the purposes of commercial law and is a subordinated debt (they are placed after common creditors in the order of priority).
What characterizes participatory loans is the payment of interest. Apart from the fact that the lender can obtain ordinary interest, it receives a variable remuneration according to the evolution of the borrower's activity.
In other words, an interest is agreed that varies depending on the profits obtained, the volume of business, the assets obtained, etc. In addition, the parties can agree on a fixed interest that does not depend on the good progress of economic activity. In practice, they usually have the interest of a participating loan, they are usually of both types.
Who can make a participatory loan?
The raison d'être of participatory loans is encourage entrepreneurship, business growth and the creation of projects.
Therefore, this financing model is used by newly created SMEs. As a general rule, they are not granted to companies operating in the financial or real estate sector.
Furthermore, it must be a viable business model and present a healthy financial situation. Since they are unsecured loans; the viability of the business plan is the determining factor for its concession. It's about a alternative financing mechanism that companies have at their fingertips.
In another order, any person, physical or legal, can agree with a company this type of financing and participate directly in its results. However, it is mainly public institutions (but also private entities) that grant this type of loan.
It should be borne in mind that, due to their nature, they are usually granted to repay in long periods of time and the parties may agree on a penalty clause in the event of early repayment.
In any case, the regulations that regulate participatory loans state that the borrower can only make the early repayment if it is compensated with an increase in his own funds by the same amount, as long as it does not come from updating his assets.
It is logical that a capital increase is necessary to be able to proceed with its early amortization, since, being considered a subordinated debt, if the company uses its resources to pay this loan, it would be left without liquidity to meet the debts of the suppliers ordinary.
How is a participatory loan accounted for?
As we have previously mentioned, a participating loan is considered equity. It is understood as net worth for the purposes of capital reduction and liquidation of companies provided for in commercial legislation. Also to determine the minimum number of share capital.
However, they are not treated as equity for accounting purposes, since they do not meet the definition in the Conceptual Framework. Therefore, they are accounted for as long-term debt, but within the basic financing of the company. Specifically, they appear on the liabilities side of the balance sheet in account 1635 (“Other long-term debts, with other related parties”).
In the same way, the remuneration that is made to the lender in the form of interest is not understood as dividends, but as a financial expense. They are credited to account 662 (Debt interest, other related parties).
In another order, based on the Article 20 of the Royal Decree-Law that regulates participatory loans, give the right to deduct the accrued interest for tax purposes.
Advantages and disadvantages of a participatory loan
Participative loans are not capital increases, since it prevents third parties from getting involved in the management of the company. However, they are a type of flexible and long-term financing that allow the company to develop all kinds of expansion projects without ceding ownership of the company.
One of the main advantages is the linking of interest payments to the evolution of the business. Besides, the interests of a participating loan are tax deductible.
Allow long repayment terms and grace periods (long grace periods are usually agreed, even several years). As it is a subordinated debt, the company's borrowing capacity is not affected (given that another type of current financing would have priority in the order of priority).
As for the disadvantagesAs you will have been able to verify, participatory loans are a complex product, which can entail some high administrative costs. It is necessary to assess all the alternatives that you have at your fingertips. For this reason, at Alter Finance we offer you the advice What do you need to find the business financing formula that best suits your needs.