Monday, March 26, 2018

Project Finance - Alternative Finance

When someone wants to purchase a franchise business they are usually required to put some capital into the purchase or as we call it, have some "skin in the game" The business would need to apply for any licenses and permits either from the current owner or apply for them yourself to the local council. There are also franchise businesses which would require a person to buy/lease the right to represent the brand/franchise company. The entrepreneur would also need to factor in the running costs such as business equipments, buildings and wages for workers. 

Project Finance

The Conventional Business Loan

The same more or less happens if you want to fund a large project. The conventional way of funding would be to apply for a bank loan. usually the Loan To Value (LTV) can be from 70% and up. This means that the project owner may have to find the other 30% themselves. Very often projects would expect that a funder provides all the funding necessary including the cost to carry out studies/due diligence etc., and the project does not need to provide any money/assets/collateral towards getting themselves funded. This is not only unrealistic but does not reflect well on the project funder. If a project is serious about looking for funding, just like purchasing a franchise, they would be required to have some 'skin in the game' - which comes in numerous ways. Be it collateral, cash equity, demonstrating existing turnover, showing a healthy balance sheet, having some seed capital, and the list goes on. Unfortunately most start up projects cannot demonstrate most if not any of the above mentioned items.

Non Conventional Business Loan

There are ways in which a project can be funded. You can obtain equity, debt funding or a hybrid (part equity/part debt ) to raise funding. Whilst it's true that it means you can get your project finance at 100%, there is a cost of doing so. This could mean that a large part of equity is retained by the funder. This project funding solution may suit startups but it can become problematic in the future. Some equity firms can be generous, there are others which have certain demands such as being on the board of directors and having a say to what happens to your company. 
How to get a project funded - business loan differences

Another Non Conventional loan to fund a project could be to purchase or lease a StandBy Letter Of Credit. Either way, it still requires the project owner to have some "skin in the game." As you can see, there is still a requirement to have some capital in order to obtain the bank instrument and virtually impossible to get a project or business financed at zero cost to the project sponsor.