The participative loan is a type of loan for companies that is characterized by the participation of the lender in the profits of the financed company, in addition to the collection of a fixed interest.
It is an intermediate financing formula between the capital stock and the long-term loan.
Characteristics of a participative loan
It has a long-term maturity and usually has a long grace period in the return of the principal, that is, a period in which only the fixed interest is paid and not the part of the principal or the variables.
The lender receives 2 types of interest:
- Fixed interest rate:Independent of the evolution of the company’s activity.
- Variable or participative interest rate:It is determined based on the evolution of the profits of the financed company. The criteria to establish such evolution may be the net profit, the volume of business, the total equity or any other that is freely agreed between the parties. Minimum and maximum limits are usually established for the participating interest rate.
The range of enforceability is subordinated to any other credit or obligation of the beneficiary company, standing only in front of its partners. This allows the company to maintain its debt capacity and the lender to assume a similar risk to the owner.
Accounting for participatory loans
They are included within the external financing. Net equity is considered for the purposes of capital reduction and liquidation of companies provided for in commercial law. In the event of unfavorable economic situations for the company, it allows delaying settlement and having more opportunities for recovery.
Accrued interest, both fixed and variable, and the financial expenses generated by the participative loan are considered deductible items for the purposes of the corporation tax base.
There is no freedom to amortize it in advance. You can only cancel early if they are offset by an equal increase in the capital of the company and face the usual early amortization fees. The parties may agree on a penalty clause in case of early amortization.
Advantages and disadvantages of a participatory loan
Among the advantages we could highlight:
- Its return is adapted to the progress of the company, so if the company does not give benefits, the principal would not have to be returned.
- Pretty long grace and repayment periods, which is ideal for early stage companies. It allows an injection of liquidity and in the event that the business works in the long term, the entire loan will be returned, if not.
- The fact that the lender participates in the benefits of the company, implies that it will be one of the most interested in making the project viable and will be flexible in terms of capital conditions, terms or interest rates.
Of course, not all are advantages. Among the disadvantages we could highlight:
- Part of the profit must be distributed to the lenders. Therefore, while it is true that they help the company evolve, they also receive their share of the benefit.
- The lender may require some decision-making power to ensure that the business will continue to evolve well. In this way, it reduces the risk derived from a bad decision that makes the company lose money and, therefore, does not allow the loan to be repaid.
Regulation of the participatory loan in Spain
The regulation of participative loans is included in article 20 of Royal Decree Law 7/1996 of June 7 , on urgent measures of a fiscal nature and the promotion and liberation of economic activity, as well as the subsequent Law 10/1996 of December 18 , on urgent fiscal measures on the correction of inter-company double internal taxation and on incentives for the internationalization of companies.