Participative loans: What is it?
Participative loans are a financial instrument intended for companies, which are characterized by the role that the lender represents in each of the benefits and evolution of the company, as well as the collection of fixed interest. In addition, this type of loan is formulated in an intermediate way with long-term loans and social capital.
An important fact that we must take into account is that in finance, a loan is a legal contract in which the parties deliver a sum of money or a fungible object, with the condition that the same amount or kind is returned to the lender. In addition, the loans offer the opportunity to pay interest, which will be accrued based on the principal amount that was granted.
The big difference between the loan and the credits is that it handles a fixed and specific amount. In addition, the loans have a large number of types, in which they are found: consumer loan, commercial loan, bridge loan, among others.
Some types of loans
- Commercial loan: This is when the applicant takes out a long- or short-term loan to finance any current asset needs.
- Bridge-loan: it is the legal contract where the parties establish the parameters of a loan, which will be canceled in a short time and destined for the reduction of the existing spaces between two long-term financial loans, until the necessary financing can be obtained.
- Consumer loan: this banking product allows you to obtain a significant amount of money in the form of a loan, as long as the interest obtained is repaid through the installments established in the contract.
This last type of loan is used to finance vehicles, vacations, studies, purchase of household appliances, modifications or reforms in the home, among other types of expenses. In addition, a very important fact about this loan is that it is not necessary to present a real guarantee for its recovery.
Characteristics of participating loans
First of all, we must bear in mind that participatory loans are regulated by Royal Decree Law 7/1996, in its article 20 and where they reflect each of its main characteristics:
The lender will obtain a variable interest, determined based on the evolution of the activity of the company requesting the loan.
This criterion was born to be able to determine the evolution of the requesting company, be it through the volume of business, the net profits, the total assets or any other aspect that it establishes with the lender of the service, significantly shortening the interests, regardless of the movement or evolution of its activity.
The reduction of the penalizing clause by the contracting party of the loan, in the event of early repayments. In this case, the loan applicant may repay the early loan early, if the repayment is offset by an increase in the applicant's own funds, as long as these funds do not come from new assets.
On the other hand, the priority order for loans held by participating creditors will be placed after that of ordinary creditors. Participating loans are considered equity based on the reduction of capital and the liquidation of companies as established by the country's commercial law. You might also be interested in the refinancing loan.
Types of interest received by participating loans
Participating or variable interests are determined based on the evolution and benefits that the requesting or financed company has achieved. These are established based on the evolution of business volume, net worth, net profit, among other characteristics established by the entity and the applicant.
In addition to being maintained based on the maximum and minimum limits to the participating interest. Unlike these, fixed interests are taken regardless of the evolution or movement that the activity of the requesting company has presented.
Four aspects that differentiate the participatory loan from other types of loans
- It has external financing: that is, the interests vary depending on the activities carried out by the company, its evolution and benefits.
- They are not free to be repaid in advance: this is, without a doubt, one of the most important aspects that the lender should have, since if there were the opportunity to cancel the loan earlier than allowed, it would significantly reduce the assets of the company and the creditors would go into an unfavorable situation before the participating lender.
- Subordination of debts and extra guarantee to other creditors.
- Equality in participating loans with the accounting equity based on the effects of a decrease in capital and the liquidation of the company.
Treatment in accounting effect: What is it?
Apart from its interesting and special characteristic of return or remuneration of interest, it does not have any type of exception when it comes to accounting, according to the Institute of Accounting and Auditing of Accounts (ICAC).
That is why it was recorded that it must be adjusted to what is indicated in the 9th valuation rule. Of non-commercial credits or by regulation 11ª. Non-commercial debts that appear in the fifth part of the General Chart of Accounts, based on whether the company receives or grants the loan.
The Institute of Accounting and Auditing of Accounts (ICAC) indicates in the resolution of December 20, 1.996, some criteria to decree the concept of accounting equity, based on the decrease in capital and the reduction of companies regulated by commercial legislation.
This legislation establishes that the loans that appear in the balance sheet of the company or company in the group of creditors, the value of the accounting equity will be taken into consideration based on the reduction of capital or dissolution of the company.
Due to this, the treatment at the time of quoting this type of loan is the same as any other ordinary loan. However, when preparing the annual accounts, it is necessary to carefully break them down in the indicated long-term debt note.
On the other hand, you will carry out the transactions from one company to another of the same group, with the aim of being able to provide the data and information of third parties, as well as the calculation of the accounting equity based on the dissolution and reduction of the companies.
Where can participative loans be requested?
In general, this loan is granted by public entities, especially those that support the entrepreneurship of individuals or new companies in a certain way, but they can also be requested in private entities that offer this service. That is, this loan can be requested in:
- Private financial entities.
- Participatory loan National Innovation Company, SA
- Regional or provincial entrepreneurship institutions.
- Participatory loans from the European Regional Development Fund.
Requirements for the participatory loan application
A point in favor of this type of loan is the fact that you do not need mortgage or personal guarantees for your application, since it is linked to the viability of the company. Due to this, its main requirement is a report of the attractive and viable business model, together with all the forecasts that may be presented in the future.
It is also important that when dealing with a company or new venture, they have a bank account with the same financial institution that is being requested or with the one they trust, as well as the registration of their company.
Application for participatory loans: Who can apply?
These types of loans are specifically aimed at new companies, entrepreneurs and startups looking for an initial investment to start their business. However, an important fact about this loan is the fact that it can be requested at any time in the life of a company.
Advantages and Disadvantages offered by participating loans
Advantage of this type of loan:
- In the case of taxation, we find that interest and commissions can be subtracted from the mandatory base of Corporation Tax.
- It offers the longest or longest repayment time compared to other types of loans.
- It has an extra guarantee before the other creditors, since the lender is located behind the traditional creditors, in terms of the importance and priority of the payments they make.
- Each of the interests can be adapted to the economic situation of the company.
- You do not need guarantees or endorsements.
- It has a longer grace period than other loans.
Disadvantage of this type of loans:
- In the event that the company has significant results in the sale of its products, the interest that must be paid is usually of greater value compared to a conventional loan.
- You do not have the freedom to cancel the loan.
- The entity or person that becomes a lender acquires a certain importance over the company's board, having the right to attend administrative councils or meetings.
- You must find a summary or report of the business activities that have been carried out with the company, as well as the benefits that it has achieved, since it represents a certain guarantee of recovery for the lender.
- A small economic reserve must be created annually as an important part of the profits and benefits that the company has managed to obtain for the cancellation of the loan on the date that the “contract” ends.
Can participating loans be cancelled?
The total cancellation of the participating loan can be done, as long as the parties have agreed to this option in the contract, in addition to having stated the commission or penalty for the early cancellation of the loan.
However, the legal regulations of the participative loans indicate that the total payment of the same before the date, is possible, if the amortization is compensated with the increase or equality of the amount of the funds that the applicant possesses, as long as this money does not come from current assets.
Participative loans are considered as funds or own money, so when canceling it, the assets of the creditors and the company will decrease, leaving them in a completely unfavorable situation. This occurs due to the liquidity of the company or business, which would be used to pay the loan and not to the debts of the suppliers.
Can you get a deficiency with a participative loan?
First of all, we must understand that a lack is the time that the capital is not amortized or the interests are canceled, significantly reducing the installments, to the point that sometimes it can be completely eliminated.
Therefore, a participatory loan allows you to establish certain grace periods, which can change based on the financial institution that would lend. This type of period is usually prolonged, in some cases reaching up to seven years.
The deficiencies are sometimes determined by the financing lines, the characteristics of the project, the purpose and even the precision of cash-flow.
What happens when a participating loan is not cancelled?
It is important to remember that each financial institution has its regulations and procedures in all the operations they offer, as is the case of participative loans, so the consequences of non-payment of this loan are tied by the institution where it is requested.
However, it may be the case that the lender changes its right to collection for the role of the company, becoming one more partner of it and obtaining the same rights in decision-making and distribution, as the other partners of the company.
If you would like to learn more about other types of loans, we invite you to visit our article on Loans for the Unemployed: How to Apply for Them in Spain?
