Participative loans, everything you need to know

We analyze one of the most important forms of financing

There are many forms of financing that go further than the obvious ones. Depending on the business model, but also the size of the company and its needs, financing options vary drastically. On this occasion, we are talking about participatory loans, a type of financing aimed mainly at companies whose operation is far from that offered by a regular financial institution with its ordinary loans.

The great characteristic of this type of loans is the participation of the entity that lends to the company in the benefits that this may generate. The situation of this type of financing is between the social capital and the long-term loans, and as an additional differentiation, it has two types of interest. In this way, a fixed interest rate is found that is normally lower than what we would find in the traditional call financing, while the variable interest is subject to the benefits that we mentioned previously, and that are based on that percentage previously agreed.

Obviously, the entity that lends the money also assumes a risk in all this because, unlike when a loan is offered through the traditional procedure, guarantees are not required here in compliance with the terms of payment of capital and interest. However, there are mechanisms in case of default, and that is that the lender has here the opportunity to convert the capital that has been lent in a percentage of participation of the company.

In this way, this situation would be the only one that would cause the financial institution to be really a shareholder of the company to which it lends the money. For the simple fact of leaving the money is not part of the same company or have the right to make decisions in it, only in case of default the bank or financial institution has the option to take the reins of the situation with a percentage equal to the money invested.

However, each agreement is different and the two parties that sign it may agree to vary these conditions that are not fixed in any case. In fact, the situation could arise that, in effect, the lender reserves the option of supervising the decisions made in the company, or that the latter submits to an audit periodically

Here are some of the basic characteristics of this type of financing:

– The maturity of the participative loans is long term.

– The variable interest of the company may be subject to either net profit, or total business volume, or total equity. A maximum limit is also placed on this second interest rate.

– It is usually required that the loan company has own funds that are higher than the given credit, thus avoiding that the lender risks more than the company itself.