Project financing is the long-term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of its sponsors.
5 Common mistakes Developers make applying for Project Financing
A short series of 5 common mistakes developers make when getting financing from alternative sources.
1) Risk identification
Developers do not see the risk as much as the Sponsors do.
Risk identification and allocation is a key component of project finance. A project may be subject to a number of technical, environmental, economic and political risks, particularly in developing countries and emerging markets. Financial institutions and project sponsors may conclude that the risks inherent in project development and operation are unacceptable (unfinanceable). Read more on Part 1 here
2) Gut Instinct vs Feasibility Studies
Developers usually have that gut instinct because they would believe they understand the market, the sentiment, and the opportunities, at the moment of participation.
They will weigh out the risk based on their instinct and some local market comparative analysis on data collected or given.
If they approach the local banks, who will simply check the developer's financial statements, collaterals, and together with a local valuation report, decide if a construction loan should be approved. That is the basis of all bank loans or mortgages.
What if the bank disapproves or comes short of the amount approved?
That is when an alternative project financing source must come in.
Unfortunately, most developers do not understand the way how these Project Financiers work and why they will approve. They will simply put up a Beautiful Marketing PowerPoint presentation and expect these Funders to approve a US$50M or a $100M non-recourse loan? Sounds absurd? No, that is exactly what 80% of the developers do. The slightly better ones will put up a Business Plan with total gross or average calculations.
That is really a gross mistake; to treat Project Funding and Bank Loans with the same attributes.
Banks value collaterals and the Developer's financial strength to pay, whereas Project Funders value the viability of the project as the greatest risk, and many times, with no substantial or tangible collaterals.
That is why a Feasibility Study by a reputable Consultant is compulsory in getting Project Financing. Many times, the funders will rely heavily on the Feasibility Study Report to assess the risk and viability of the project, not what the developers tout in their marketing presentation.
So, if a Developer has no Feasibility Study Report, the probability to get funding is next to 0% unless the funder is extremely familiar with the location and market potential of the project.
Then again, having a splendid Feasibility Study Report only qualifies you to knock on the Funders' doors. It doesn't bring you into their arena. What is more important is related to the 3rd most common mistake a developer does; their Cash Flow spreadsheet. That's our 3rd series. Watch out for it.