What is a participating loan

These loans offer beneficial conditions for entrepreneurs, since the loan repayment is adapted to the progress of the business itself.

A participatory loan is halfway between the injection of capital by a private investor and a regular loan offered by a bank. This type of financing tends to have some fairly accessible requirements for qualification, and the interest charged is linked to the progress of the business. Furthermore, their long repayment periods and deferment options make these loans a useful financing tool for companies still in their early stages.

Participatory loans are based on the philosophy and fundamental purpose of fostering the creation of viable business enterprises with a focus on growth and consolidation. This is why loans of this type tend to be primarily granted through public entities dedicated to supporting entrepreneurship. However, there are also private entities offering this type of financing. Regardless of the lender, participatory loans have three main characteristics that make them unique: interest, repayment and conditions for qualification.

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Flexible interest rates and longer terms

Participatory loans typically offer two interest rates. The first of these rates is always charged, as the interest linked to progress of the business. This makes it a variable interest rate the may change depending on a variety of assessment criteria, with the most typical being the company's annual net profit. This interest rate also tends to be established between a minimum and maximum level.

Some participatory loans also have a second, fixed interest rate that is stipulated at the time the contract is signed. This interest is independent of the progress of the business and tends to be expressed as a margin established by the lending institution itself, with this rate tending to be lower than those charged for ordinary loans.

Therefore, the interest charged on participatory loans is much more flexible than the interest on other types of financing because the repayments to be made by business owners are adapted to the progress of the business, within certain limits.

Although financial markets offer a wide range of financing products, participatory loans offer some of the longest repayment terms. Specifically, and depending upon which institution is lending the money, a participatory loan may even have a repayment period of up to 10 years.

However, early repayment is only possible if the company performs a capital increase for the same amount being repaid. Furthermore, if early repayment occurs there are usually some fees and penalties the borrower will have to pay.

Any deferment periods that business owners can access (e.g., by temporarily making lower, interest-only payments) are likely to be longer than with a typical loan. In terms of actual figures, some institutions offer up to 7 years of deferment.

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Accessible participatory loan qualification requirements

It was explained above that the philosophy behind the existence of participatory loans was to facilitate entrepreneurship and the creation of business enterprises; the eligibility requirements for this type of financing are therefore closely linked to the viability of the company and its business model.

Therefore, when deciding on whether to grant a loan, the bank will request a detailed report of the business model rather than personal or mortgage guarantees. The intention is to determine whether the company's future looks promising, and decide whether or not it is safe to invest money in it.

Another advantage of participatory loans is that the associated financial costs (e.g., interest and other fees) can be deducted from the Corporation Tax base.

In addition, these types of loans are subordinated and their repayment priority is behind that of regular creditors. This makes it easier for borrowers to manage the different debts held by their company.

Finally, participatory loans are considered as equity for purposes of capital decreases.

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