Participative loan: what it is – Dictionary of Economics

Definition of participatory loan

It is a type of loan (it appears in the liabilities of the balance sheet) that is intended for companies that are characterized by the participation of the lending entity in the profits of the financed company.

It has the following unique characteristics:

– Equity is considered for the purposes of capital reduction and liquidation of companies provided for in article 363 of the capital companies law.

– The remuneration is at a variable interest rate depending on the evolution of the activity of the borrowing company, such as net profit, turnover, total assets,…, although the parties may also agree on a fixed interest if so determined.

As the interest rate is linked to the evolution of the company, it can even be zero.

They are mainly used by the parent companies to inject funds into their subsidiaries given their great flexibility (the term, amounts, amortization,… is freely set by the parties), because it avoids the causes of dissolution of the companies and the expenses of the operation are very small, although it is also used by public administrations to help companies in crisis, since in addition to providing funds to companies, they manage to avoid dissolution due to losses

They are regulated in 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 and establish, in addition to the aforementioned, a series of conditions on the same, such as that the borrower may only repay the participating loan early if it is compensated with an increase of the same amount of its own funds.

For loan priority purposes, they are considered the last lenders to collect, and only ahead of shareholders.

Its most notable characteristic is that, appearing in the liabilities of the balance sheet, they are considered assets for the purposes of dissolution.