An equity-linked loan is a form of financing that falls somewhere between debt and equity: the company receives money that it must repay, but part of the interest depends on how well the business performs. It requires no collateral, does not bring in new partners, and, for commercial purposes, counts as equity.
At Domoblock, we’re well acquainted with the challenge of financing a startup: we started with our own capital and a “friends & family” round, went through the Lanzadera program, and in 2024 closed a €250,000 funding round with business angels from the real estate sector. Drawing on that experience, we’ll explain how this type of financing works, who provides it, and how it’s taxed.
What is an equity-linked loan, according to the law: one that meets the criteria set forth in Article 20 of Royal Decree-Law 7/1996. The lender receives variable interest based on the company’s performance, measured by net profit, revenue, total equity, or any other criteria agreed upon by the parties. Additionally, they may agree on a fixed interest rate.
It is considered a hybrid instrument because it has characteristics of both debt (it must be repaid) and equity (the interest depends on the business, is paid after ordinary creditors, and strengthens net equity).
The characteristics of the participatory loan combine features established by law with others that are agreed upon:
An equity-linked loan functions as a loan with two interest tranches and a long repayment schedule.
The fixed portion is always paid. The variable portion depends on the agreed-upon indicator: profit, sales, or return on equity. A common formula, used for example by Enisa, is as follows: the variable portion is the difference between the company’s financial return (net profit divided by equity) and the fixed portion, subject to a cap.
Illustrative example: a €200,000 loan over 7 years, with a 2-year grace period, a fixed rate of 4%, and a variable rate capped at 4%.
| Year | Company’s financial profitability | Fixed interest (4%) | Variable interest | Total interest | Amortization |
|---|---|---|---|---|---|
| 1 | −8% | 8,000 € | €0 | €8,000 | €0 |
| 2 | 8% | 8,000 € | €8,000 (4%) | €16,000 | €0 |
| 3 | 20% | 8,000 € | €8,000 (4% cap) | 16,000 € | €40,000 |
In Year 1, the company loses money and pays only the fixed amount. In Year 3, it makes a large profit, but the cap limits the cost. Starting that year, it repays 40,000 € annually for five years.
The terms are long: Enisa, for example, generally amortizes the loan over up to 7 years, with up to a 2-year grace period and quarterly payments. If the company wishes to repay the loan early, it must conduct a capital increase for the same amount, and the contract may provide for a penalty (Art. 20.1.b of Royal Decree-Law 7/1996).
Participatory loans occupy a middle ground between the other two options. These are the differences that determine when each option is appropriate:
| Aspect | Traditional Loan | Participatory loan | Capital increase |
|---|---|---|---|
| Collateral | Standard | Usually not | No |
| Cost | Fixed or variable interest rate | Fixed plus variable depending on the business | Dividends, if any |
| Member contributions | No | No | Yes |
| Order of priority in bankruptcy proceedings | Ordinary | Subordinated | After all creditors |
| Counted as net worth | No | Yes, for commercial purposes | Yes |
An equity loan is neither good nor bad in and of itself: it depends on whether you’re the company or the lender.
The requirements for an equity-linked loan vary by lender but generally include the following:
These are the main ways to obtain an equity-participation loan from ENISA or other institutions.
ENISA (National Innovation Agency) is a public entity under the Ministry of Industry. According to its website, accessed in November 2026, it grants equity-participation loans ranging from €25,000 to €1,500,000 without collateral, with up to a 2-year grace period, a 0.5% origination fee, and interest divided into two components: Euribor plus a spread and a variable rate based on the company’s profitability.
Many autonomous communities have development institutes or corporations that grant equity-participation loans to companies within their territory, often for specific sectors such as industry or innovation. The terms are set for each call for applications.
Some banks offer equity-participation loans, typically to companies with a proven track record and sometimes in combination with public financing programs. As financial institutions, they assess creditworthiness just as they would for any loan.
Equity-based financing platforms connect companies with investors who lend money. In the European Union, they are regulated by Regulation (EU) 2020/1503, and in Spain, they are authorized and supervised by the CNMV. If you’d like to compare models, our blog explains what real estate crowdlending is.
A business angel may prefer a participatory loan to taking an equity stake, especially in early stages. What we’ve learned from negotiating with investors is that, more than the financial instrument itself, it’s important to align expectations: what information they’ll receive, how often, and what happens if the plan is delayed.
The tax treatment of equity-based loans differs for each party. Regulations in effect as of 2026.
Interest, both fixed and variable, is a deductible expense for corporate income tax purposes, subject to the general limit on financial expenses: 30% of operating profit (Art. 16.1 of the Corporate Income Tax Law). The major exception is loans between companies within the same group: interest on such loans is considered a return on equity and is not deductible (Art. 15.a).
If the lender is an individual, the interest is considered income from movable capital arising from the provision of personal funds (Art. 25.2 of the Individual Income Tax Law). It is taxed at the savings tax rate, ranging from 19% to 30% depending on the amount, with a 19% withholding tax (Art. 101.4). If the lender is a corporation, the interest is treated as ordinary income for corporate income tax purposes.
In the real estate sector, some developers and platforms use participatory loans to finance specific projects: the variable interest rate is tied to the proceeds from the sale or development. For the investor, this has two implications.
The first is that it is subordinated debt: if the project fails and the company files for bankruptcy, the investor is paid after unsecured creditors, such as the bank or suppliers (Art. 20.1.c of Royal Decree-Law 7/1996). The second is oversight: when the loan is offered through a participatory financing platform, that platform must be authorized by the CNMV. You can verify this in its official records.
This is the instrument we use at Domoblock: each investor’s stake is formalized as a participatory loan to the project, recorded on the blockchain (Polygon network). Their return depends on the outcome of the transaction; as Sergio says, “the difference between the costs of purchase, construction, and sale results in a capital gain.” If the sale is delayed or proceeds below expectations, the investor receives payment later or in a reduced amount, and as a participatory lender, they are paid after the ordinary creditors. Their returns are taxed as capital gains, subject to the 19% withholding tax mentioned above. Domoblock does not provide participatory financing services nor does it offer instruments regulated by the CNMV.
Before investing, always ask who the borrower is, what debts they have outstanding, and what happens if the sale is delayed.
Real estate investing involves risks, including the potential loss of principal, and liquidity may be limited.
It depends on who grants it. If it is granted by a reporting entity, such as a bank, it is reported to the Bank of Spain’s Central Risk Information System (CIRBE) like any other risk; Bank of Spain Circular 1/2013 provides specific codes for participatory loans. If it comes from a private investor, it does not appear [VERIFY the case of Enisa].
Generally, no. Public loan programs, such as those offered by Enisa, finance SMEs organized as corporations, and the program itself is designed for companies with equity and annual financial statements. A self-employed individual who wishes to apply usually must first incorporate a company. Some regional programs may have exceptions: check each call for applications.
Yes, if agreed upon. The usual method is a capital increase through debt-for-equity swap: the lender becomes a partner in exchange for the loan. In a limited liability company, the debt must be due and payable (Art. 301 of the Capital Companies Act). This dilutes the shareholders’ stakes, so it’s advisable to stipulate this in the contract.
Usually not. Approval is based on the viability of the business plan and the company’s equity; Enisa, for example, does not require guarantees. Some private entities may request personal guarantees from the partners, especially for companies with little track record. Be sure to read this in the contract before signing.
At Domoblock, we work with three types of projects: house flipping, building flipping, and new construction. In all cases, the investment is structured as a participatory loan, and we send investors a monthly update on each project.
With our real estate co-investment opportunities, you can invest starting at €200, 100% online. It’s free for investors: you pay nothing directly, and Domoblock charges a 5% management fee, which is included in the project costs. The historical IRR of our projects is +15% annually; this is historical data and does not guarantee future returns.
Real estate investment involves risks, including the potential loss of principal, and liquidity may be limited: there is no secondary market; there may be delays in construction or in the sale; you may lose some or all of your invested capital; and this capital is not covered by the Deposit Guarantee Fund. Domoblock does not offer financial instruments regulated by the CNMV.
A participatory loan is suitable for companies with a solid business plan that do not want to give up equity or are unable to provide collateral. Before signing, estimate the cost in a bad year and in a very good year, and review the cap on the variable interest rate and the terms for early repayment. If you are the lender, remember that you are paid after ordinary creditors.
This article is for informational purposes only and does not constitute tax, legal, or financial advice, nor is it an investment recommendation. Past performance is no guarantee of future results. All investments involve risks, including the partial or total loss of principal: consult a professional regarding your specific situation.
.png)
Pedro María Ric, 5
Funded
100%
€550,012.94
Target
€550,012.94
.png)
.png)
.png)
.png)
.avif)
.avif)
