When a company needs money and the bank is not an option, the conversation usually goes straight to a capital increase. An investor comes in, puts in the money, takes a percentage. That is natural if what you want is a partner, but often it is not, and whoever gives up equity finds out late that votes, economic rights for good and a slice of control went with it.
There is another route. It is used far more than people say, and almost nobody explains it properly: the participating loan (préstamo participativo).
The two of us sign this piece because we look at it from different places. One of us from the law: how it is drafted and what happens when something goes wrong. The other from the side of whoever puts in the money, which is where she has spent much of her career. And in the negotiations where we meet there is a moment that almost always comes, when the founder realises it is not as cheap as they thought and the investor that it is not as comfortable either.
What the law requires
A participating loan is not a trade name. It is defined in Article 20 of Royal Decree-Law 7/1996 of 7 June, which asks four things of it.
First, that the interest depends on how the company performs. The lender receives variable interest linked to the business's performance, and the parties choose the measure: net profit, turnover, total assets or whatever they agree. Nothing prevents adding fixed interest payable in any event.
The second is the one that surprises founders most: it cannot simply be repaid early. Early repayment is only possible if it is offset by an equity increase of the same amount, which moreover may not come from revaluing assets. A penalty can be agreed on top.
Third, in the order of payment it ranks behind ordinary creditors. And fourth, it is treated as net equity for the purposes of capital reduction and the winding-up of companies under company law.
For all that, it is still a loan. It is repaid at maturity like any other debt. And the lender is not a shareholder: it does not vote at the general meeting, appoint directors or receive dividends.
Net equity, dissolution and what the Supreme Court says
This is where much of its usefulness lies, and most of the misunderstandings too.
The Spanish Companies Act requires a company to be dissolved when losses reduce net equity below half of the share capital, unless the capital is increased or reduced sufficiently and provided insolvency proceedings are not appropriate (Article 363.1.e). Directors have two months to call the general meeting. If they do not, they answer personally for the company's subsequent debts (Articles 365 to 367).
Because a participating loan counts towards net equity, it can get a company out of that situation without bringing in a new shareholder. So far, so clear. The trouble is what gets done in practice, and the Supreme Court has already said a good deal about it.
In judgment 696/2016 of 24 November, the First Chamber accepted that participating loans from shareholders count as net equity, but provided they meet the legal requirements. An ordinary shareholder loan is a repayable debt, whatever its term. Judgments 363/2016 and 215/2020, both of 1 June, add that net equity is measured by accounting rules, not by the directors' view; the loan must be properly documented and recorded as participating.
The most telling is 79/2023 of 24 January, from the Third Chamber. The directors of a loss-making company had signed participating loans and were nonetheless held liable for its social security debts. The court did not dispute that such loans could repair a balance sheet. What happened was that, even with them, net equity stayed below half the share capital year after year, and that was enough. The lower court's judgment, which the Supreme Court upheld, also warned of something we see often: converting shareholder loans into participating loans without a real effect on equity is an operation more formal than real.
A well-made participating loan protects the balance sheet and whoever runs the company. A cosmetic one does not.
If insolvency comes
For years it was unclear what happened to these claims in the borrower's insolvency. The old Insolvency Act said nothing about them, and courts reached opposite results: some treated them as ordinary claims, others as subordinated. Legal writers leaned towards the latter.
The 2020 consolidated text ended the debate. Its Article 281.1.2 lists among subordinated claims those subordinated by contract, "including participating loans".
For founders who lend to their own company there is also a second route to subordination that tends to go unnoticed. A shareholder holding at least ten per cent of an unlisted company, or a director, is a person specially related to the insolvent debtor (Article 283), and their claim is subordinated for that very reason (Article 281.1.5), whether the loan is participating or not.
Tax and accounting
Within a group of companies, as defined in Article 42 of the Commercial Code, the tax authorities treat the participating loan as if it were equity. The company paying the interest cannot deduct it (Article 15.a of the Corporate Income Tax Act), and the company receiving it treats it as an exempt dividend, unless it generated a deductible expense for the payer (Article 21.2). The rule does not reach loans granted before 20 June 2014. Outside a group, interest follows the general regime for finance costs, with its limits. It is worth checking before signing, especially if the money comes from the parent or a sister company.
In the accounts, on the other hand, it is a debt. Counting as net equity is a company law effect set by statute, so the notes and the accounting records need to identify it clearly; if one day you have to prove there was no ground for dissolution, it is the accounts that will be examined.
What the investor will ask for
This is what founders do not usually see coming. The lender ranks behind creditors and its return depends on the business, so it will want to see and control a good deal more than a bank.
The first thing negotiated, and the one that causes most arguments later, is how the variable interest is calculated. If it depends on profit, it has to be defined precisely, because profit moves with the company's own decisions: what the shareholders are paid, depreciation, transactions with related companies. A badly drafted measure is a lawsuit waiting for a date.
Then come information rights (periodic accounts, budget, the documents behind the calculation) and undertakings, known in the jargon as covenants: no borrowing above a certain level, no dividends while the loan is outstanding, no selling essential assets or changing business. And it is usual to agree that, if they are breached, the investor may call the loan in immediately.
Often the investor will also want to be able to convert its claim into shares in a future round. Conversion is done through a capital increase by set-off of receivables (Article 301 of the Companies Act), which has its own requirements, and the loan has to be drafted with it in mind.
All of this is reasonable. It is the price of money that takes more risk than a bank's, and the job is to measure each clause against the real business plan.
What the company should not lose sight of
That it cannot be cancelled at will. If money comes in two years from now and you want to repay, the law requires an equity increase of the same amount, and if that has not been planned for, the loan becomes a tie.
That it can be expensive. Between the fixed rate, the variable rate in a good year and the fees, a participating loan often costs more than a bank loan; what you are buying is flexibility and equity, not a low rate.
And that, if it is signed to remove a ground for dissolution, the numbers must be run on an accounting basis beforehand, not afterwards. The courts look at the result.
Who provides them?
Private investors, business angels and family offices, but above all ENISA, the state-owned company attached to the Spanish Ministry of Industry and Tourism, which finances innovative SMEs and start-ups this way. For many young companies it is the first serious money they receive without giving up equity, and often what later helps attract private investors.
To finish
A participating loan works well when the company needs to strengthen its balance sheet and grow without sharing ownership too early. It works badly when it is used to postpone a conversation about equity that will come anyway, or when it is signed only to make the accounts add up.
Before signing, ask two questions: what happens to this loan if the plan goes well, and what happens if it goes badly. If both answers convince you, and the contract and the accounts reflect them, it is probably a good deal.
Sources
- Royal Decree-Law 7/1996 of 7 June, Article 20.
- Consolidated Companies Act (Ley de Sociedades de Capital), Articles 301, 363.1.e) and 365 to 367.
- Consolidated Insolvency Act (Royal Legislative Decree 1/2020), Articles 281 and 283.
- Corporate Income Tax Act 27/2014, Articles 15.a) and 21.2, and seventeenth transitional provision.
- Supreme Court, First Chamber: judgments 696/2016 of 24 November; 363/2016 of 1 June; and 215/2020 of 1 June.
- Supreme Court, Third Chamber: judgment 79/2023 of 24 January (ECLI:ES:TS:2023:297).
- "Las decisiones de los tribunales en torno a la clasificación de los créditos derivados de los préstamos participativos en el concurso de acreedores del prestatario", Revista Crítica de Derecho Inmobiliario, no. 765 (2018).
- "El préstamo participativo: consecuencias prácticas de su contabilidad", Revista Jurídica de la Universidad Autónoma de Madrid, no. 49 (2024), pp. 97-110.
This article contains general information for informative purposes and does not constitute legal advice or an investment recommendation. The rules cited may have been amended after publication; always check the text in force before taking a decision.