What is a participatory loan?

The participative loan is a very common financing instrument among companies in early stages, characterized by the presence of the lender that, in exchange for a certain amount of money, participates in some of the benefits of the financed company, in addition of the collection of a fixed interest previously established. Traditionally, it is considered as an intermediate figure between the injection of capital by a private investor and the loan offered by financial institutions.

This product has become highly relevant in the entrepreneurial field, since it can be used by loan companies or private investors to finance a start-up. These would have the possibility of eventually entering the emerging company as a partner, since the contract establishes a period of time after which the investor can decide between requesting the loan to be repaid or transforming that debt into a percentage of capital participation. of the society.

Participatory loans have thus been conceived as a way to promote the creation of viable business projects with prospects for growth and consolidation. Therefore, the requirements to access this form of financing are closely linked to the viability of the company and its business model. Thus, when formalizing a loan of these characteristics, instead of requiring the usual personal or mortgage guarantees for the granting of a loan, financial institutions usually demand a detailed report of the business model, in order to know to what extent the company is sustainable, has future prospects and, therefore, it is safe to bet or invest money in it.


Advantages and disadvantages of a participatory loan

As we saw in previous lines, the main advantage of participative loans is that they do not require guarantees, although for their concession it is necessary to present a quality business plan that guarantees the viability of the business project.

Furthermore, the interest on participative loans is much more flexible than that of other types of financing, since the amount of the installments that the entrepreneur must pay adapts to the evolution of the company itself. As for amortization, although within the financial market there is a wide range of financial products, participative loans offer the longest amortization periods. Thus, depending on the type of entity that grants the loan, the repayment of the loan can last up to ten years.

In the same way, the grace periods to which the employer can receive are usually longer than in loans to use. In fact, sometimes up to seven years of grace are offered, which, during that time, will allow the financed company to pay reduced installments that only amortize the interest.

On the other hand, the financial expenses linked to this type of credit, such as possible commissions or interest, are deductible from the tax base of corporation tax. In addition, its priority of payment is behind that of normal creditors, which is an ease when facing the lack of liquidity or possible debts of the company.


Participative loans are considered equity in terms of capital reduction

Among the disadvantages of this financial product is that companies do not know what the real cost of the loan is, since it will depend on the evolution and the economic results that the company obtains from its performance. In fact, entities that start to reap positive results will have to pay a higher interest rate than with other financing methods. As a general rule, financing is more expensive after the sum of the fixed and variable interest associated with the loan. In addition, the financial institution that grants the credit usually requires the applicant company to make an annual financial reserve to pay the loan granted with part of the benefits obtained.


What is a participatory loan model like?

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Participatory loans are regulated by article 20 of Royal Decree-Law 7/1996, of June 7, on urgent measures of a fiscal nature and the promotion and liberalization of economic activity.

Two interest rates are reflected in a model participative loan contract. The first is always present, and is the one that is linked to the company’s results. It is, therefore, a variable interest that changes according to the annual net profit. This interest rate is usually also set by minimums and maximums.

On the other hand, there would be the fixed interest that is stipulated at the time of the formalization of the contract. This interest is independent of the company’s income statement and is usually a differential set by the lender itself.

This type of agreement must be implemented in writing, without it being necessary to raise it to the public in a deed granted before a notary, so the bureaucratic burden and the added cost that it entails is a point in favor compared to, for example, the capital increase.

In conclusion, participative loans can be a very interesting source of financing for certain companies that are starting their business and have a future projection. They are usually long-term loans in which their early repayment is limited, so the lender is the first interested in the success of the business project and, therefore, in making the terms of the loan more flexible. In addition, in the event that the company must be liquidated, the participative loan is considered part of the net worth and helps to delay or even prevent the closing of the company.


Long-term loans or short-term loans?

There are several ways to classify loans: by means of the type of guarantee used as collateral and depending on the duration of the loan.

Based on the type of collateral, we can distinguish four types of loans: personal collateral loans, collateral loans, home equity loans, and pledge collateral loans.

If, on the contrary, we take the duration of the loan as a reference, we find two types: long-term loans and short-term loans. Let’s see how the latter are distinguished!


Differences between long-term loans and short-term loans

Differences between long-term loans and short-term loans

The main distinguishing feature between a long-term loan and a short-term loan resides, as we have mentioned, in the duration of the loan. While the first has a maturity of more than one year, the short-term loan does not exceed 12 months.

Another difference is that short-term loans are usually used to request amounts of money lower than what is usually requested in long-term loans. This is because short-term loans tend to focus on meeting specific and urgent needs, while long-term loans are used to finance large operations such as the acquisition of a property, a vehicle, the start-up of a business or any other operation whose development is carried out over a long period of time.

When opting for one or the other option, it is not only essential to be clear about these aspects, but also what advantages and disadvantages each of them entails. Let’s see them!


Advantages and disadvantages of short-term financing

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The most notable advantage of short-term financing lies in the possibility of obtaining money immediately.

In a few minutes we can request our short-term credit online and obtain an almost instantaneous response. It does not require excessive bureaucratic procedures or paperwork and, as a general rule, it is not necessary to physically go to the office to formalize the procedure.

Another advantage of these loans, compared to long-term loans, is that they have lower interest rates and, therefore, the cost of financing is lower.

However, short-term loans, as we mentioned, offer a smaller amount of money (usually not exceeding 1,000 euros) than long-term loans. This is an essential aspect that the applicant must take into account when deciding on one or the other option.

Another aspect to keep in mind in short-term loans is that the repayment period of the borrowed amount is shorter and cannot be postponed. If this happens, it would be necessary to pay high default interest for having failed to comply with the stipulated return period.


Advantages and disadvantages of long-term credits

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Adaptability and flexibility are two of the most notable advantages of long-term loans. By offering the option of returning it over a long period of time, it allows, in many cases, to choose the number of installments with which the loan will be amortized. That is why long-term loans are better suited to the solvency of each.

In addition, in many cases, long-term loan contracts can be modified or renegotiated, and there are few occasions when grace periods apply. The key to these loans is that, between the lender and the borrower, they establish a long-term relationship, which gives priority to establishing optimal conditions for the borrower and that, at the same time, the lender can receive the borrowed capital plus interest .

Despite these advantages, these types of financial products also have their “buts”. In addition, requesting fast long-term loans seems more complicated than in the case of short-term loans since greater detail is usually required in the documents and this can delay the management and granting of them. Solvency is a determining factor when applying for any type of loan, even more so in long-term loans, so if we do not have any monthly income, it is very possible that we will be denied it, since in that case Asking for a loan could be a problem for us.