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Participatory loan, what is it and what are its advantages?



When an entrepreneur decides to start his own company or expand the one he has already formed, he often needs money to get his project to fruition. The good news for them, and perhaps for you, is that there is a comfortable and flexible financing option; This is the participatory loan, which can be accessed without major inconveniences.

If you continue reading this article you will know what a participatory loan is, what are its characteristics and main advantages.

But if you want other options, you may be interested in knowing the 7 alternatives to banks for financing SMEs and freelancers that you will find in the previous link. You may also be interested in deepening concepts such as crowdfunding and crowdlending or loan between individuals.

What is a participatory loan?

What is a participatory loan?

A participatory loan is a special loan that can only be accessed by companies and whose main characteristic is the fact that the entity granting the loan (lender) participates in the benefits received by the receiving company (borrower).

This type of loan is considered an intermediate financial instrument between the share capital and a long-term loan.

In general, participatory loans are granted in order to support the creation of viable business projects headed by entrepreneurs that are focused on their growth and consolidation.

Although in most cases they are granted by public institutions created to support entrepreneurs and small business owners, they can also be processed by private financing agencies.

Characteristics of the participatory loan

Characteristics of the participatory loan

Below we highlight three of the main characteristics of a participatory loan.

  • Fixed interest: When the loan contract is formalized, the lender establishes a fixed interest rate in order to cover inflation or the opportunity cost; and which does not depend on the operation or the results of the company. However, the value of this interest is considered symbolic because the lender’s earnings will depend on the results of the company.
  • Variable interest: This interest rate is related to the operation and evolution of the company (therefore it is not always the same) but it is accompanied by minimum and maximum values. In accordance with the regulations governing participatory loans, as a criterion to determine the evolution of the company, you can take the net profit, the volume of business, the total equity or any other freely agreed by both parties.
  • Early amortization: Participatory loans can only be repaid in advance if the amortization is offset by a capital increase whose amount is similar to that of the loan. Likewise, when the contract is established, the parties agree to a penalty clause for those cases in which early repayment occurs.

Main advantages

Main advantages

Let us now highlight some of the advantages of participatory loans over other types of loans.

  • Although the participatory loan must be agreed in writing, it is not mandatory to present it at the notary, consequently, it is not necessary to waste time or money in bureaucratic procedures.
  • A large number of requirements are not needed, sometimes only a report is needed where the company and its growth plans are presented.
  • The return of the borrowed money depends on the results of the company that has received it.
  • Long periods of lack and amortization. To give just one example, some financing entities grant 7 years of lack.

With this information you should already be clear about what a participatory loan is and why more and more entrepreneurs are coming to them to carry out their business. If you decide to apply for one in Spain you can do it through the National Innovation Company or some other public or private entity in the country.