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Success Tips for Obtaining Project Finance
We often get questions about how to qualify for the best terms to finance projects overseas. Here are some of those frequently asked questions:
- What is a “Sponsor” and what are the project ownership rules?
- Can the Borrower be an individual or must it be a corporation?
- How can we best describe the project’s Operations & Management Team?
- What types of equity or assets qualify?
- Project Costs/Funding Plan — how to show cash vs. “in kind” contributions of equity?
- What are the acceptable project implementation timeframes?
- What Country Data and Developmental Aspects are most important?
- How do we show Market Feasibility?
- How do we show the financial (business) base case?
Questions 1-5 will help with summarizing a project seeking capital (called “pre-application”), and Questions 3-9 are some of the most frequently asked questions and detailed answers for preparing the complete loan application.
1. What is a “Sponsor” and what are the project ownership rules?
To qualify, a U.S. citizen principal, investor partner, or “sponsor” must be involved as an equity holder or other long-term relationships. If the sponsor is a corporate entity, indicate where incorporated, owners’ names and share of ownership.
To be deemed a U.S. company, the sponsor or investor needs majority U.S. citizen ownership. If sponsors are individuals, provide industry track record experience. Citizenship or permanent resident status both qualify.
Other US involvement may satisfy this 25% minimum sponsorship requirement, such as when U.S. brand-name franchisors, operators or contractors are significantly involved in the project on a long-term basis.
2. Can the Borrower be an individual or must it be a corporation?
The loan application requires that you identify the legal entity that will borrow the funds, with associated legal information disclosed, including ownership structure. If the entity has not yet been registered as a corporation, give information about where you expect to incorporate and on what date, prospective owners, and their respective ownership shares.
If ownership structure entails a special purpose investment company, provide further information on any equity holders with 5% or more of indirect ownership interest in the project. Provide summary qualifications of major investors, their financial capacity to support their investment in the project, and perhaps some potential credit enhancement/guarantees.
3. How can we best describe the project’s Operations & Management Team?
After the pre-application has been approved, the full application will request 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 pre-application, however, the management team overview might take up just a few paragraphs or a half page at most, with separate resumees or CVs (in MS Word or PDF format) for each principal available. Be sure to include those who have at least 3 years of succesful track record in the relevant industry and/or host country.
4. What types of equity or assets qualify?
Equity/assets can come from other loans or capital (cash), foundation or government grants commited or received, estimated “in kind” contributions (see below), real estate, inventory and equipment. This last category of inventory or tangible physical assets will usually be discounted, using 80-90% of their value, to reflect depreciation or current market value.
Assets that can be used for a pledge of collateral are usually capital assets mentioned above as well as buildings, infrastucture, electronics or other hardware, land, raw materials, goods for sale (inventory), or other items recently purchased and/or with a fair market value. Include both current assets as well as those to-be-procured from loan proceeds. The collateral pledge is typically equal to or greater than the loan amount.
If the existing equity or pledge of collateral are thin, it is often helpful for the project sponsor 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, against cost overruns pior 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.
5. Project Costs/Funding Plan — how to show cash vs. “in kind” contributions of equity?
Summarize the Total Project Costs/Funding Plan (Sources & Uses) in a table with breakdown of major expenditure categories. See sample table in Sections 6 & 7 as a tool or for reference. For each category of expenditure, discuss and provide data on bases for 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 is at least 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.
6. What are the acceptable project implementation timeframes?
Most loans originated by In3 reach final maturity in three to twenty years, and can include a suitable grace period — usually up to 24 months — during which only interest is payable. A planning worksheet is available upon request.
Once the loan pre-qualification has been approved, work with In3 to describe the implementation timetable, including construction management, if applicable. Together we will use the business plan narrative (outline also available) to document the identity and qualifications of designers, construction contractors and other major parties involved in the project’s implementation, including possible contractual terms with vendors. Provide details on infrastructure that impacts the project (energy, water, communications), and its sources. This may tie in with the project team’s track record and exerience; or at least the contractors that will be hired by the management team.
7. What Country Data and Developmental Aspects are most important?
Highlight macroeconomic country/regional indicators that impact the project. 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.
a) Market Size and Demand: Provide 2 years of historical data on target market/industry size together with 3 years of projected growth. Give bases of estimation for 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 time frame as above for the prices project will charge for products/services. Analysis on how 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 their estimation basis (how calculations were derives, industry benchmarks, or references to reputable source data). We use a proven format for either startup (“greenfield”), renovation or expansion projects. Excel worksheets are available.