Success Tips / Impact FAQs

Success Tips for Obtaining Impact Project Finance

We often get questions about how to qualify for the best terms to finance projects in the US or overseas. Impact investors, institutional sources like US DFC, and private sources like Family Offices sometimes offer subsidized or concessionary financing for projects that deliver social and/or environmental benefits. There is a lot to know … mistakes are easily made and, with some careful attention, or professional advise taken to heart, also easily avoided. Knowing industry jargon helps.

Here are some of those frequently asked questions:

Questions 1-5 will help with summarizing a project seeking capital (called “pre-qualification“), and Questions 3-9 are some of the most frequently asked questions and detailed answers for preparing a complete application or proposal for financing.

Got more questions? Review this Completion Assurance/Capital Guarantee Program™ FAQ, more about How We Work, or take steps to qualify … then if still unanswered, ask us!

1. What is a “Sponsor” and why might you need one?
When the developer/owner lacks financial depth, they can involve a “sponsor” or backer to qualify for better capital terms. The sponsor may request a fee or other incentive for backing a project as that enables better loan terms and often makes the difference between a project that gets stuck in due diligence and one that actually gets funded. Various types of financial guarantees can be used for this purpose.

Projects are typically financed via a combination of equity and non-recourse loans (a Special Purpose Vehicle owns the project’s assets on a standalone basis, otherwise without personal liability to the owners) where the guarantee traditionally serves as “credit enhancement” and thus lowers the offered interest rate (we can arrange as low as ~3% APR fixed for as long as needed, no penalty for early repayment), while maximizing the owner’s rights to profits. There are other important benefits with In3’s Completion Assurance [Guarantee] Program (CAP), including up to 100% of the capital required for middle-market projects, faster closings, greater flexibility to cover the cost of any remaining pre-construction development steps and much more.

When seeking bespoke funding at CAP’s advantageous terms, a sponsor’s financial guarantee ensures that developers retain control of their own project. If they wish to sell it outright, that’s also possible, but most developers prefer to keep as much of the cashflow rights as they can. Equity investor partners are, by definition, part owners, entitled to their share of cash flows, and obtaining a completion assurance guarantee until Commercial Operation Date (COD) greatly improves the developer’s odds of reaching closing, streamlines and accelerates due diligence (we commit to reaching closings in 30 days or less) and decreases the overall cost of capital.

There are often additional benefits to securing a sponsoring party’s support, through their “good faith and credit”, as doing so enhances the borrowing power of the project company and access to our funding program. This guarantee is the responsibility of the project owner (the funder cannot pay for it, as that defeats the purpose of it), and we offer advise on how to facilitate such guarantees free of charge. If you want In3 to handle that for you, go here. More tips on keys to involving a guarantor.

Does your project deliver positive social and/or environmental impacts? When impact investors are asked to serve in a sponsorship role, the main incentive for doing so is the realization of the project’s social/environmental impacts, or at least furthering whatever is the firm’s mission and purpose. Be quite clear about how exactly this fits with the sponsor’s objectives (study their portfolio of previous projects or project investments, if available) before contacting them. Further, when service providers or equipment suppliers are tapped for their support as sponsors, there is usually an inherent incentive in gaining a lucrative contract with the project company, with the underlying agreement detailing how each party will perform their respective roles and responsibilities. See How to gain a Completion Assurance Guarantee Sponsor step-by-step procedures.

This form of cooperation between developer and sponsors often delivers compelling mutual benefits (synergies), which requires careful calculation of the risk/reward equation by the sponsor. Fortunately, when developer’s are prepared for taking this step, the real world risks to the sponsor are quite nominal. The guarantee is tightly governed by the Loan Agreement for the project, and well-established banking rules, making sure all the necessary funds are delivered on time per a pre-approved schedule, and that the underlying guarantee cannot and will not be misused or called arbitrarily.

Sponsors can be

Private companies, such as well-established Engineering, Procurement & Construction (EPC) or General Contractor (GC) firms, integrators, or larger Original Equipment Manufacturers (OEMs). Some developers may be able to provide a Financial (Completion Assurance) Guarantee for their own project using a Commercial Promissory Note with a bank “aval” (AvPN) added per our templates.
Private investors, such as High Net Worth Individuals (HNWIs), single or multi-Family Offices (SFO or MFO) or other groups — either to cover the cost of a Completion Assurance Guarantee (bank guarantee / standby letters of credit that are sent via SWIFT incur a fee from the bank), provide underlying collateral until a milestone is reached, such as project completion and commissioning, or via a Promissory Note with Aval (more), or as a bridge loan to cover fees (reimbursed out of project funding draws, typically within 60-120 days), or other structures. If you want In3 to make arrangements with a private investor as a premium service, go here.
Government agencies (such as a sovereign government’s Ministry of Finance — emerging, developing and middle-income countries), as a Sovereign Guarantee.
Not-for-Profit Organizations — NGOs can sponsor or otherwise support projects they see as mission-aligned in order to realize their inherent social and/or environmental impacts, or for “earned income” if the NGO wishes to use sponsorship for their own fundraising.
Financial Institutions such as multilaterals US International Development Finance Corporation (DFC, formerly known as OPIC) or World Bank Group’s IBRD), or regional development banks (MDBs), or even Export Credit Agencies (some Export-Import Banks). NOTE: Generally, only top-rated commercial banks can issue an acceptable Demand Guarantee, not multilaterals, which are typically public/private and unable to comply with the verbiage requirements for in-house In3 funding. We can accept many different types of financial guarantees (not completion bonds/insurance), with the most widely used either a cash-backed bank guarantee or standby letter of credit (BG/SbLC) with a market value close or equal to the face value issued. Others are subject to a significant discount. Ask us if the available verbiage is workable.

The sponsor’s main contribution is a financial guarantee or partial guarantee. (A financial guarantee is a contractual mechanism for risk sharing with the project company and equity partners. It opens up additional, often quite attractive, pathways to capital.) Traditional sponsors are used primarily when seeking debt capital from private or institutional lenders as a form of credit enhancement, but some private lenders (namely In3’s family office) use them as a form of construction/completion risk mitigation and bank collateral, held only until project completion. More about In3’s Completion Assurance Program™ (CAP funding) and the differences that spell out your advantage.

The types of asset that can be used vary widely, and depend largely on what the issuing bank would be willing to accept — from cash on deposit, to a corporate balance sheet (basic creditworthiness of the sponsor) to off balance sheet assets like developed property, buildings, precious metals, bonds, or public equities. This is between the sponsor and their bank. Some banks will allow direct purchase of a guarantee for a larger fee, and although the Beneficiary (the party that receives the guarantee in order to fund against it) can accept such a guarantee, the cost is likely prohibitive — doesn’t make economic sense to obtain cost-sensitive project funding, as is usually the case with CAP.

The advantage here is that illiquid developers, contractors or other stakeholders with assets available during just the project’s construction period can serve as capital guarantors, securing an advantageous arrangement for the sponsor, and enhancing the developer’s credit, instead of requiring any of these parties to serve as a source of direct investment. A well-established EPC firm or General Contractor, for example, can bring forward a completion assurance guarantee to “win” the contract, ensuring that all the funding for the project will be pre-committed, while obtaining other benefits from the developer as can be arranged.

Some capital sources regularly sponsor projects they can support without playing an active contractor or subcontractor role, in exchange for a modest piece of the project’s equity (rights to a small portion of the operating cashflows).

This “capital preservation strategy” can be a maker/breaker for ambitious projects worldwide, but are particularly helpful in developing countries, or with project developers that have no remaining seed capital to get projects financed, where In3’s program enables 100% of the project funding, at any reasonable stage, to flow reliably and at quite favorable terms.

See Proposal Builder or request an available package of materials (a presentation, sample contracts, and mutually beneficial safety procedures), or our set of generic PowerPoint slides that explain CAP and can be incorporated in your own materials, if you wish to contract with a project sponsor.

2. Can the Borrower be an individual or must it be a corporation?
Project loans require that you identify the legal entity that will borrow the funds, with associated legal information disclosed, including ownership structure as well as any available financial statements. If the entity has not yet been registered as a corporation, give information about where you expect to incorporate and on what date, names and titles of the owners/officers, and their respective ownership shares.

Most projects establish and use a Special Purpose Vehicle (SPV), effectively a holding company, which limits recourse to the entity owners. Generally, we would want to see a disclosure of any equity holders with 5% or more ownership interest in the project. If seeking debt only, provide summary qualifications of the major equity investor(s), their financial capacity to support their capital contribution in the project, and the borrower’s potential for credit enhancement/guarantees. Some investors may be better involved as project “sponsor” (see above) or loan guarantors than as a direct source of financing.

3. How can we best describe the project’s Operations & Management Team?

This depends on the investor’s definition of acceptable risk exposures. More traditional lenders (including impact investors) are largely intolerant of risks, including execution risk, which is the one factor that is “baked” into the proposal, as it is based on who is requesting the funding. This requires deep experience and a solid track record of success.

Long-term (senior) debt usually requires a detailed description of operations, management organization and their capabilities (key personnel, their experience), as well as a description of inventory and financial control systems. At that time, you will be able to include a discussion of management decision-making/reporting and financial reporting.

In the summary version of “who is doing this project,” the management team overview might take up just a few paragraphs or a half page at most, with separate résumés or CVs (in PDF format, typically) for each principal available in the data room or as an Appendix to the full business plan. Be sure to include those principals who have at least 3-5 years of successful track record in the relevant industry and/or host country.

By contrast, In3 CAP funding uses long-term “mezzanine” debt at slightly below market rates, and is less particular about prior experience and history of success by the management team, but project owners still must be reasonably well prepared and good equity partners, as are we.

4. What types of equity can be used to leverage debt? What types of assets qualify for pledging Senior Debt collateral?
Project equity investments can come from private, institutional, or dedicated funds, and may be in the form of direct cash, or as non-senior debt (subordinated debt, short-term debt such as construction finance, mezzanine, etc.), foundation or government grants (already committed or received, typically), prior major expenditures (purchase or lease of land, for example; also inventory or equipment) as well as the cash capital and labor invested by the project developer in getting to the current state. This is the “equity” inherent in ownership and the rights to cashflows that most developer want to preserve.

In3 offers an innovative structure (via CAP funding) of mezzanine debt and equity from one sources, up to 100% financing. Similar, but with more stringent due diligence, 100% debt options have emerged that do not require any equity, but instead use refundable cash deposits ahead of closing. Compare these options.

Two important notes: 1) Some fee-based developers prefer to get paid and move on — selling their carried interest in a project outright (BOT or BOOT models), while others prefer to retain an equity stake, majority or minority. What do you prefer?

2) With In3’s Completion Assurance [Guarantee] Program™ (CAP) …

We do not require a separate equity investor at all — we offer a hybrid of debt and equity for up to 100% of the required financing. Bringing in additional capital sources is fine, and would proportionately reduce our aspiration for an equity carried interest.
We also do not require or use Senior Debt (also called asset-backed debt) at all, which would ordinarily require that a lien be perfected against the project’s assets, pledged as collateral, such as via UCC-1 listing. Instead, we offer “mezzanine” debt (which for project finance resembles owner equity or sometimes called “quasi-equity”), typically at 3% APR fixed for the life of the loan.

See additional summarized differences, advantages and benefits of the CAP funding approach here. If you pursue funding using CAP, you can skip the rest of this answer. It only applies to conventional project finance, not CAP.

Traditional project debt, like home loans, require a pledge of collateral as security, sometimes called “senior position” or a “mortgage.” Senior lenders require this, often in addition to a performance guarantee or loan guarantee. The underlying collateral is typically a combination of real estate, physical facilities, non-mobile equipment or other tangible assets with market value. Labor, IP, know-how, services, deposits, permits, or other contracts, although essential to the business, are usually not considered when making a pledge of collateral. Tangible physical assets will usually be discounted, using at most 80% of their value, to reflect depreciation or adjusted market value, only as a form of security for the senior lender in the event of loan default.

Assets that can be used for a pledge of collateral are usually capital assets mentioned above as well as buildings, infrastructure, electronics or other hardware, raw land, developed land, raw materials, goods for sale (inventory), or other items recently purchased and/or with a fair market or “book” value. Include both current assets as well as those to-be-procured from loan proceeds. The collateral pledge, after discounts, is typically equal to or greater than the loan amount.

If the existing equity or pledge of collateral are thin (such as is usually the case when seeking 100% project financing), it is often essential for the project sponsor or owners to offer a written loan guarantee that says, in effect, responsibility for servicing the loan shifts to the guarantor in the event of default. Such an agreement would also guarantee the completion of the project, provide coverage against cost overruns prior to completion of the project, or early operating problems, despite careful planning and an allowance for contingencies in the financial plan. This will not only make loan approval easier but in most cases also decreases the annual percentage rate (APR) for the loan.

Summarize the Total Project Costs/Funding Plan (Sources & Uses) in a table with breakdown of major expenditure categories. See the last line of Creating a Sources and Uses Statement if applying for a loan from US DFC or other senior lenders. For each category of expenditure, provide supportive data (written price quotations, for example) on the basis for any given estimates, where practical. Discuss sources of cash equity contributions, including cash, prior or new loans, grants, etc., from US or other investors. Generally the expectation with US DFC is at least 20-25% of the project equity would come from a US sponsor. A US sponsor is defined as either a US citizen or a company that is majority owned/operated by US citizens.

For in-kind (already existing) asset contribution, discuss bases for estimation. Note that valuations acceptable to the lender will be needed, including estimates to support in-kind contributions, during loan application due diligence.

5.1 How to obtain a CAP Guarantee — or jump to 5.2 Why insurance product like performance/completion bonds are not acceptable instead of a financial guarantee

5.1 How to obtain a project Financial (Completion Assurance) Guarantee

If you are part of an established company with either operating history, balance sheet depth, substantial assets or net worth, but not working in a country that offers Sovereign Guarantees, there are several options available for bringing forward a financial guarantee to rapidly secure project funding through us.

If you are a non-wealthy individual or a company without substantial operating history or assets, focus on the third or fourth options, shown below, which entails strategic use of a “sponsor” or backer.

Start with the first option shown, if possible (fastest to implement), then use the others if necessary: Either …

1) Bring forward a guarantee directly from your own bank as a Bank Guarantee or Standby Letter of Credit. You would apply for it, like any other product offered by the bank; download sample verbiage with application. Gather the basic info as shown on page 2. Ask your bank what they require.

2) Involve your bank to record your company’s guarantee as a Commercial Promissory Note with their “aval” or stamp (more). Assuming you do not already have a sponsor or suitable backer for your project such as a private party or sovereign government (often used in the developing world, arranged as a public-private partnership), the only other options are

3) Arrange for a vendor (EPC firm or General Contractor) to sponsor the project’s completion surety. Similar to a completion bond, you can present the opportunity to a short list of well-established EPC firms or General Contractors that you are interviewing as possible service providers or vendors (or sometimes equipment suppliers to the project are willing to bring the guarantee) as a condition for receiving the contract. Although not an insurance product, a completion assurance guarantee serves a similar purpose — requiring that the parties work together to ensure that the project reach Commercial Operation Date without fail. The EPC or GC can ask their bank to issue the instrument on behalf of the project, with benefits to them explained our PowerPoint materials available to qualified project developers. “How to” step-by-step procedures.

4) Ask In3 to obtain a project sponsor on your behalf on a fee-for-services basis. At present, this is limited to the sectors in which we have expertise, namely renewables, waste-to-value, and regenerative agriculture / sustainable food systems. Ask us for a quotation.

See also Tip #1, above, for the full range of possible sponsors.
Confused? Want a step-wise approach? See Deciding which type of Financial Guarantee has the most advantages

5.2 What about insurance as a financial (completion assurance) guarantee?

The short answer is insurance products are not financial instruments that any funding bank would accept. More at Difference between Insurance Products & Financial Guarantees. Financial instruments include a bank’s Standby Letter of Credit, Bank Guarantee, Performance Guarantee, Payment Guarantee, endorsed Promissory Note … all per established international rules that uphold provisions contained in our various sample templates. There are many similarities between an insurance “Completion Guarantee” (or bond) and CAP’s “Completion Assurance Guarantee” (as the names imply), but important differences, too.

This distinction matters because the funder has to show their bank a financial instrument (not an insurance policy) to agree to provide up to 100% of the funding. Some of the funds from the family office (FO) are in the form of the FO’s holdings (the equity carried interest, typically) while the rest rely on established lines of commercial credit over which the funding bank has a duty to securitize the undertaking via this financial instrument. Any and all types of insurance coverage — completion bonds, surety bonds, completion guarantees, performance wraps, PRI insurance, what World Bank MIGA calls a “guarantee facility” (or MGF, actually insurance), and all other insurance products — do not constitute an acceptable financial guarantee.

Why not, you ask? Mainly because …
1) This funding program’s innovations and advantages depend on this becoming a bank-to-bank transaction, and with insurance the completion bond is not given to the funding bank, but instead goes to the developer (most often from an EPC or General Contractor hired to build the project), and
2) We seek a so-called financial “completion assurance” guarantee in order to unlock the partner’s funding. Our partner’s funding bank would not accept insurance coverage due to the party backing it (an insurance company, not a bank).

Even if there’s an insurance bond or surety bond of some sort, insurance companies are not commercial banks, and the mechanisms are sharply different. A bond would kick in should the developer run out of funds to complete the project. But with CAP, 100% of the funds are pre-approved and committed (including enough contingency to cover all reasonable eventualities) from the FO’s bank, so the developer will not run short. Insurance may be useful to offset or mitigate other risks, such as been an EPC and the project’s developer. It just will not work instead of a financial, bank-to-bank guarantee.

We seek a financial guarantee because In3’s partner bank has to authorize the transaction, per international rules for such “demand guarantees” (like URDG ICC 758), so that CAP’s funding can get secured and deployed for qualifying projects. Our partner’s funding bank transfers funds to the project SPV’s bank account using a pre-committed monthly draw schedule, and the funding bank only accepts financial guarantees that follow well-proven international rules. Simply put, no insurance policy thus constitutes a financial guarantee as required by our partner’s banks.

Of course if an insurance company could offer their bank’s financial guarantee on behalf of a project (instead of an insurance product) that would likely be acceptable under the preferred legal venue, Uniform Rules for Demand Guarantees (more on URDG ICC Pub. No. 758) or similar rules. That’s an entirely different (and possibly confusing) scenario.

Such insurance products are indeed customary when developers work with a General Contractor or EPC firm to design/engineer/procure and then build/commission their project. Our funding program’s use of a financial “completion assurance” guarantee serves as a type of surety for project completion, which is similar to a completion/performance bond, but also different in kind — because the issuer and backer of insurance bonding is typically an insurance company, not a bank. Even if there’s a private party offering the insurance bond or “wrap” then we must simply arrange mutually acceptable verbiage for the instrument itself, so the banks involved are working together with the right tools.

Although some banks will more-or-less “sell” you a financial guarantee (and/or charge fees for the SWIFT message used by our partner’s bank to verify legitimacy), or may require an asset of some sort to backstop this completion guarantee (ask your bank what assets they would accept), it is common for issuing banks to assume you are asking them for either a Documentary Letter of Credit (widely used for commodity Trade Finance transactions) or a Loan Guarantee, neither of which are necessary. More on this and other vital communication with bankers here.

If the developer does not have sufficient financial depth (assets on a balance sheet, or otherwise within reach) then the above-described backer/sponsor may be the best option. Acceptable guarantees come from any rated bank, or a company (via their bank), or an autonomous government’s Ministry of Finance (in the case of Sovereign Guarantees), … just not an insurance company. To bring this point full circle, if an insurance company’s bank could issue the completion assurance guarantee, then the family office’s bank would accept it. Does that make sense?

More on the overarching purpose of this financial/capital guarantee here (FAQ #2).

6. What are the acceptable project implementation timeframes?
Most loans originated by In3 reach final maturity (get paid off) in three to twenty years, and can include a suitable grace period — usually up to 36 months — during which only interest is paid on the portion of the loan or credit facility that has been drawn.

To pre-qualify, describe the implementation timetable, including construction management, if applicable, as a series of capital draws with corresponding milestones to be reached. Some contractors require a deposit, others look for a different method of ensuring they will be paid reliably, based on invoicing. CAP has the advantage of locking down the transfers of funds needed to see the project through to Commercial Operation Date, thereby guaranteeing the availability of funding to pay vendors and service providers. This is often a key concern of their, which becomes a strength of your offer to hire them when using our innovative funding program.

In your project’s business plan narrative, identity the qualifications of designers/engineers, construction contractors and other major parties involved in the project’s implementation, including possible contractual terms with short-listed vendors. Provide details on infrastructure that impacts the project (energy, water, transportation, communications, administrative offices, etc.), and either the source of existing facilities/utilities, or the plan to construct whatever is needed. This may tie in with the project team’s track record and experience; or at least the contractors that will be hired by the management team.

7. What Country Data and Developmental/Impact Aspects are most important?
Highlight macroeconomic country/regional indicators that impact the project. Country credit ratings can be important, and the borrower’s credit can be “enhanced” through loan guarantees, or if necessary, Political Risk Insurance for the equity investors. Identify particular regulations (if any) that will impact the business of the project. Include in the project summary the project’s developmental aspects for the country in question. Who will benefit? How? Provide some narrative on how this project will help with the development of the country in terms of employment, training and managerial capacity transfer, contribution to fiscal health (alleviation of poverty or subsistence wages), environmental aspects such as climate protection, reduction or elimination of toxins, waste, etc.

8. How do we show Market / Financial Feasibility?

a) Market Size and Demand: Provide 2 years of historical data on target market/industry size together with 3 years of projected growth. For example, if using nodal (merchant) pricing instead of a long-term offtake contract (such as a Power Purchase Agreement, or PPA), what is the historical pricing at that particular node of the electrical grid, or geographic location of the project if not selling electricity? Be sure to give the basis (document your assumptions) for estimations or “pro forma” projections, and sources of data. Correlate this with projected estimates of demand for the particular products or services (sources of revenue) of your project.

b) Supply/Competition: Provide 1 year of historical data and 3 years of projected estimates on suppliers (as above, identify sources of data and bases of estimation). Identify who will be your primary competitors, competition for what (e.g., market share), and the project’s competitive advantage in relation to competition.

c) Market Share: Provide estimates, in light of market size/demand and supply data above, on what will be the project’s market share and why you expect to achieve this.

d) Prices: Need data on same timeframe as above for the prices project will charge for products/services. Provide analysis on how to compare to competition.

Note: All numbers presented in market analysis and feasibility should directly correlate with assumptions in financial model.

9. How do we show the financial (business) base case?
The project’s financial model is typically developed in collaboration with In3 personnel in order to document and verify sufficient cash flows to service the loan. The financial model should be accompanied by written assumptions with explanations on bases for their estimation. We use a proven, GAAP- and IFRS-compliant format for either startup (“greenfield”) or expansion projects. Worksheets are available.

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