Convertible participatory loan
What is a convertible participatory loan?
A convertible participatory loan is a special form of financing that combines the characteristics of a participating loan and a convertible loan.
- It is participatory, which means that the lender participates in the profits of the borrowing company, charging variable interest depending on the evolution of the company’s activity..
- It is convertible, which implies that the lender has the option of converting the credit owed by the company into shares or shares of the same, becoming a partner or shareholder.
Therefore, a convertible participatory loan is one in which the lender can choose between collecting the borrowed capital plus variable interest, or converting the loan into the company’s share capital.
When to use this contract?
This type of loan is usually used by startups, which need financing to develop their idea and are looking for investors who add value and knowledge to the business.
-Advantages:
- It allows obtaining financing without having to assign part of the share capital from the beginning, but only if the lender decides to convert the loan into shares.
- It offers flexibility to repay the loan, since the interests are adapted to the profitability of the company and longer terms or grace periods can be negotiated.
- It helps to improve the solvency and debt capacity of the company, since the participating loan is considered as equity for accounting and commercial purposes.
- Facilitates access to new investors, since the lender can become a strategic partner that supports the growth and consolidation of the project.
-Disadvantages:
- It involves sharing the company’s profits with the lender, which can reduce your own profit margin.
- It involves assuming the risk of losing some control and ownership of the business if the lender exercises its conversion option.
Essential content
- Identification of the parties.
- Amount, destination and duration of the loan.
- Interest accrual.
- Capitalization of the loan.
- Communications and notifications between the parties.
- Confidentiality clause.
- Jurisdiction and applicable law clause.
Optional content
- Early amortization.
- Payment date.
- Antidilution.
- Quarterly reporting.
Necessary information
It is necessary to take into account that there are a series of requirements to be able to apply for this type of loan:
- Submit a detailed report on the business model, demonstrating its feasibility
- Have a legally constituted SME, that does not belong to the financial or real estate sector, and that has a solvent financial situation.
- Keep a correct audit of the accounts.
Applicable law
- Royal Decree-Law 7/1996, of June 7, on urgent fiscal measures and the promotion and liberalization of economic activity.
- Civil code
- Commercial code
- Capital Companies Law
Related concepts
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