So you need ten million dollars and more for your project – you have already spent most of what you have on getting it off the ground and things are looking close to reality for its launch. The only problem is that you need outside capital injection to really get things moving. The underwriting team at LLAGROUPEUROPE explains how you can get your money and the pitfalls involved.
Getting Funds for your Project
To greatly assist your chances of funding for a project, it will need to be one that has already passed ‘start-up’ phase showing good development movement (eg, building plans, permits/ licences already in place, plant/ equipment etc. purchased). Therefore, if the project is ‘green field’ (a good idea supported by a CV and not much else), then it is unlikely to attract any serious investors. Investors like to see: the idea for development; a start with a business structure and actual money put in already by the project owners. Applicants should also be prepared to offer good collateral/ or a guarantee (eg. pre-buyers) for the lending. Collateral could be in the shape of fixed and floating charges on assets, real property, insurance, etc.
The Funding Institution
Bank lending is generally quite expensive and will invariably involve you in putting down a hefty amount up front as security deposit before any funds get into your hands. So if you don’t have a lot of security, best to try the open market first and there are many avenues around. Most merchant financiers in the open market cover their risks by syndicating their lending. Others buy in and re-assign funds to make up the loan (this is an expensive option though for you) and often in such cases take a profit share. But beware, generally, good funding companies are those who are willing to provide proof of funds/ means to funding prior to Deal Sheet stage and you should be careful of those who won’t do this. Also beware of funders asking you to deposit large sums (eg., 10% to 30% of the loan) prior to the receipt of any funds from them. You should never do this without taking adequate precautions in the form of, say, escrow, or similar provisions and also taking on board the advice of your lawyer.
Your Business Plan
Your business plans should include:-
* Project item (power plant, shopping mall, etc.)
* Development site (valued and zoned with the necessary planning/ technical permissions in place, or able to be put in place)
* Executive team (include financial, technical, managerial and legal experts)
* How much that has been spent on the project so far
* The level of indebtedness of the project (how much it owes so far)
* The value of the project (state how much is needed to be borrowed and why)
* Proposals for borrowing (include sequence for funds in and the proposals for the payment of financing fees, interest and capital)
* Contingency for professional fees (they should include: financial intermediary fees (anything from 1% to 8%); legal professional fees and outside expert fees)
* Provision for your ‘up-front’ costs prior to receipt of loan funds
Note on your ‘Up-Front’ Costs
You will need to be able to satisfy lenders that your project details (site, zoning permissions, existing capital outlay, current assets, etc.) are real and reliable and this will normally involve you in some pre-funding, or ‘up-front’ costs. Some lenders will insist on site visits, independent expert’s reports (to include valuations, risk assessments for insurance etc.) and other formal details which will give them confidence that you are a good risk. In the majority of cases, you will need to cover these costs yourself and lenders are not keen to pay your ‘up-front’ costs for you as should your project details prove unreliable, or weak, they could lose considerable sums of money by carrying out the ‘up-front’ work. Your ‘up-front’ costs could be anything from USD1000 to USD250, 000 depending on the size and complexity of the project and will need to cover them directly, or instruct independent experts at your cost who will carry out the evaluation work for the lender.
One effective way of cutting out your ‘up-front’ costs for lenders would be to present a bank guarantee for the money to be borrowed which will also ensure that the lending proceeds with greater speed. There are a number of good agencies in the market that offer sourcing deals for bank guarantees from prime banks.
Applying for Funding
Your project proposal should be a truthful “sales” document. Its job is to inform and to convince the funder of the merits of funding the project. It is not to boast or to deceive. If you exaggerate your project so it comes close to, or is actually dishonest, you may be reported to relevant fraud agencies and face criminal prosecution and/or action for damages. In addition, your project may be placed on an international blacklist so that it will be difficult, if not impossible, for it ever to be funded in the future. You have been warned 🙂
The project proposal must show why the applicant thinks the project is worthy of funding and give a clear business case (indicating risk and profit for the funder) to the financial institution. Remember that there will be many other organizations and individuals competing for the funds so first impressions are important. If necessary, use diagrams or charts to illustrate key points. The presentation should be tailored to the institution approached and express willingness to be interviewed personally by the funding agency once they receive and read the proposal request.
Proposals should be neat and tidy, preferably typewritten, and without any extraneous or unnecessary information. Most institutions supply an application form for funding proposals. If this applies, the form should be filled in carefully and completely as fund managers are very busy and will be negatively impressed by untidy/ incomplete applications.
Funding companies should be chosen carefully, as if applications are declined, especially after the due diligence process has started, this may affect the applicant’s credit record and also how other funders will view the application (as this may need to be declared).
Applicants should not be discouraged if their proposal is not accepted. They should try to find out why, and then approach another institution. Note that less than 3% of all applications for funding get Term Sheets issued; however 80% of the applications that pass Term Sheet due diligence go on to offers of funding (Deal Sheet).
Project Presentation Structure/ Business Plan
The front cover of the proposal should state the value of project and the amount required for borrowing.
The body of the project proposal should cover the lending term and include:
* Total cost of sales (include intermediary and professional fees/ costs of lending)
* Average unit price
* Average profit per unit sale
* Anticipated sales volume (if you have pre-buyers, or guaranteed sales give full details)
* Profit/ Loss projection over the total lending term
* Target market and penetration success (include expert reports as necessary)
* Risk factors
* Exit strategy for the lender
* Brief technical summary of the project
* Executive Team (include CVs and management/ responsibility structure).
Here is a summary structural guide for your project presentation
* Cover page;
* Project Summary (a brief overview of the whole project including salient financial details). It is best to write it last, when the overall picture of the project is clear;
* Organisational overview and management (a brief description of the project owner and his previous achievements). You may include references as well;
* Project details (its outcome and objectives), implementation plan and budget;
* Appendices and supporting documentation.
**While every effort has been made to ensure the accuracy of this article, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please feel free to contact the author.**