The participating loan is a regulated financial instrument in the ARTICLE 20 OF ROYAL DECREE-LAW 7/1996 and it is an excellent financing tool for entrepreneurs since the loan repayment takes into account the evolution of the business.
A participatory loan is somewhere between an investor and a bank, since the entity or person lending is very interested in the success of the project, so there is some flexibility in the conditions for repaying the capital granted, the deadlines, the interest rates, and even the way in which the whole process is structured.
What are the essential characteristics of participating loans?
Guarantees or sureties:
- Except in very special cases, no guarantees or collateral are required; the business model itself, its viability, the people involved in the project, its potential commercial projection, the real capacity to repay, or, in other words, the potential growth and consolidation in the market, is what guarantees or secures the loan.
Interest:
There are two types:
- Variable: According to agreed valuation criteria depending on the evolution of the company’s activity (for example, a percentage of net profit or turnover) with minimums and maximums.
- Fixed: Regardless of the evolution of the activity, and a fixed amount that can be settled annually, without being particularly aggressive for the company.
Waiting period:
- The period in which only interest is paid and not the borrowed capital.
Amortization:
- The time in which the loan repayment or settlement is made.
- The evolution of the business is taken into account.
- They tend to be longer than commercial banking and can even take up to 10 years, although the usual term is 3 or 5 years.
Early repayment:
- This refers to the partial or total repayment of the loan before the previously agreed date.
- In SMEs, this is not usually done to avoid situations of financial stress from liquidating the participating asset and preventing the payment of other creditors.
- If this occurs, a capital increase will be required to ensure liquidity; that is, the partial or total repayment must be covered with another inflow of money.
- When it is granted, a penalty clause is included, that is, an amount is charged that compensates, at least partially, for the interest that the lender would have charged during the entire agreed time.
Profit sharing:
- It is usually linked to interest and, as already mentioned, depends on the company’s profitability and net profit, so in the first few years it is very likely that it will not be received or will be very low. Otherwise, it depends on the agreed rate.
Accounting:
- According to the INSTITUTE OF ACCOUNTING AND AUDITING (ICAC) Participating loans must be treated as “non-commercial loans or debts”, and in the annual accounts they must be broken down with a note of “long-term debt”.
What are the main advantages of participating loans?
- They are considered external financing.
- No capital increase is required, and the shareholding structure remains the same.
- It does not have to be deposited in the Commercial Registry, saving on Notary and Registry fees, although there is a type of convertible participating loan that allows the debt to be transformed into capital at a certain time and, in that case, it must be registered.
- These are subordinated loans, meaning that the creditors of the participating loan are paid after the ordinary creditors, so that other sources of financing can be accessed.
- Fixed and variable interest rates are considered a financial expense and are deductible from Corporation Tax (except in companies within the same group), and within the limits of ARTICLE 16 OF THE LIS.
- The principal is repaid at the end of the loan term.
- Since only interest is paid, reduced installments will be given in the first years, with less pressure on the company.
In addition to private participatory loans, public funding is also provided, with the aim of fostering the creation of an entrepreneurial system.
The essential references in the Canary Islands are the SPEGC, SODECAN either ENISA.
We recommend contacting each of these organizations through the links provided. They will undoubtedly be of great help in the development of businesses and ventures in the Canary Islands.
To determine the amount to be financed, the age of the company is taken into account, and it is important to convey what the actual stage we are in is, in order to determine the amounts that can be chosen.
It is clear that having signed contracts, sales or income, or having validated our business model with thousands of users, is not the same as just starting with an idea, however brilliant it may be, because what is sought is the repayment of the loan and that it is compatible with the evolution of the company.
And if we’re going to investors or funds for innovation, we have to be innovative; that is, more of the same won’t do, and we have to offer something different that can even be disruptive.
Private support is usually given because of trust in the project leader or their business model, and in that case it can be considered “friendly financing”, with which you can negotiate the best conditions, but you must always remember that it is not a gift, and the best way is to respect other people’s money as if it were one hundred percent your own.
Always remember that when someone, whether in the public or private sector, is giving you their money to develop a project, it’s a commitment similar to a marriage: Respect between both parties is essential, or else the divorce will soon start to show its claws.
We always recommend signing a Confidentiality and Non-Competition Agreement (if the other party refuses to sign, immediately assume they are not such a friend) and finding a way to fairly compensate those who trust you.
Not all money is good, and even less so seemingly easy money.
From TODO ES SINGULAR we offer services to carry out the best possible presentation and negotiation.
Go to hola@todoessingular.com and we will help you.
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