What is a participating loan

A participatory loan is halfway between 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 https://green-touch.org/ a useful financing tool for companies still in their early stages.

The philosophy behind participatory loans and the reason for their existence is to encourage the creation of viable business enterprises, with a focus on the company’s 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.

Flexible interest rates and longer terms

Flexible interest rates and longer terms


In general, participatory loans have two interest rates. The first of these rates is always charged, as the interest linked to the 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.

The interest charged on participatory loans is therefore much more flexible than the interest on other types of financing, since the amount of the installments the entrepreneur must pay is adapted to the progress of the business itself, and always within some limits as mentioned above.

Although the financial markets offer numerous types of financing products, participatory loans have some of the longest repayment periods. 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 will only be allowed 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 the entrepreneur may be able to take advantage of, such as 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 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.

Thus when deciding on whether to grant one of these loans, a bank will request a detailed report on the business model rather than require 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.

The advantages of a participatory loan also include the fact that the associated financial costs, such as the interest or any possible fees, can be deducted from the Business Tax assessment base.

Furthermore, loans of this type are subordinated, and their repayment priority is behind that of regular creditors. This gives the borrower a better ability to manage multiple debts for the company.