Participatory loan, a financing channel for startups and SMEs

[jrineakter]

One of the most common financing methods for a new company or startup is the convertible equity loan. This is a loan agreed by both parties for a certain period of time, after which, instead of returning the money, the lender becomes a shareholder of the company. We tell you what exactly a equity loan is, what advantages it has and how to apply for the ENISA loan for young entrepreneurs.

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What is a participating loan?
Participating loans are a financing instrument for companies that are characterized by the participation of the lending entity in the profits of the financed company , in addition to the collection of a fixed interest. It is considered an intermediate figure between the company's own funds and external resources.

This is a long-term loan, through which the entity lends money as the objectives of the business plan are achieved.

Traditionally, it has been used to provide subsidies or public aid by public capital lenders such as the National Innovation Company, SA (ENISA).

But it can also be used by entities or iran number data private investors to finance a startup . This would imply the possibility of becoming a partner in the company, since the contract establishes a period of time after which the investor may request the repayment of the loan or decide to convert it into a percentage of participation in the company's capital. In this way, if the company has not had the expected results, the investor can choose to claim the repayment of the loan and renounce becoming a partner in the company.

Characteristics of a participatory loan
Fixed and variable interest linked to a business indicator
The variable interest rate is linked to a business indicator, which is why they are called participatory loans. This indicator depends on each case. It can refer to sales, turnover, finishing a product, reaching a number of clients, etc. In practice, profit or turnover is usually set as a criterion and it is quite common to set a maximum limit for this variable interest rate.

A fixed interest rate may also be established, although this is usually symbolic (in order to cover inflation rates or opportunity costs), since the idea of ​​this type of loan is that the lender “participates” in the borrower's results.

Restriction on early repayment
The law only allows early cancellation of the loan if it is offset by an increase of the same amount in the company's capital. In this way, the company is not decapitalized and harm to other creditors is avoided. It may happen that the parties agree on a penalty clause in the event of early cancellation.

Subordination to other debts
They have a rank of enforceability subordinated to any other credit or obligation of the beneficiary company. This means that the lender is placed after the common creditors in a bankruptcy process and will only collect before the company's shareholders. This leads the lender to assume a risk similar to that of the owners.

It is normal to require that the company's equity be greater than the loan, so that the lending institution can ensure that it does not risk more than the company itself in the project.

They are considered net worth
Participating credits are considered net assets of the company for the purposes of capital reduction and liquidation of companies provided for in commercial legislation. This is important in the event of an unfavourable economic situation for the company because it allows its liquidation to be delayed, offering it more opportunities for recovery.