Challenges in Financing Investment Projects
Your have excellent project, you don’t have enough money and you think it is the greatest challenge to reach financing?
In principle, it is never a problem in financing but in other factors important for the project mostly due to the fact the financing sources are very interested to employ their surpluses and they will reasonably consider every investment opportunity.
So what’s the catch?
Basically, all financing sources have own measure for risk. We won’t go in details on risks, but certainly it should be borne in mind that there will be general risks specific for the market, industry or project itself discussed. Financing sources will with risk bind expectations in terms of returns – bigger risk, bigger expected return.
Financing sources will when setting risk rates for a particular project consider also:
1. Project development phase
It is necessary to note that project development phase is extremely important factor and the most of investors set their own preferences and specialisations. E.g. if you start new business based on your business idea and you have your business plan ready so you expect that a bank will approve a loan. Almost certainly it will not because early project (or company) development phase bear the high risk, usually unacceptable to banks. Further more, even if a loan would be approved, related interest rate would be set so that the majority of projects would not stand it.
2. Keeping the control over the project
The project owner has a portion of fund needed for the project and usually it already invested certain funds and efforts in the project so investor expects mentioned to be enough to retain the control over the project even after additional financing rounds. On the other hand, financing sources have their own control mechanisms, either as explicit (should be implemented immediately) or contingent (in certain circumstance) and surly there are such a source of financing which would leave the full control the project owner. The portion of control which can be kept depends of project owner own sources, the proportion of external financing, total project value or number of different investors willing to be involved in the project. Let’s say, real estate projects can sometimes be realised with the full control of the project owner if the owner invest in the land, construction documents and building permit and needed external financing in form of a bank loan. On the other hand, high risk projects where owners invested significant funds, but need small share to finish specific early development phase, could attract investor who would for the 10% share request 100% control till the successful finishing of development phase.
Expectations of owners in terms of retaining the control over further project realisation is one of the most often obstacle in investment project deployment, or in other words inability of investors to take control over the project could result in the high risk rate set by investor or withdrawal from the project.
3. Project management
Risk will also be attached to assessment of project management. It will be the most positively viewed if the management has the same or similar successfully deployed projects in own track records. If financing sources asses that the management does not have adequate competences, they will cancel financing or eventualy seek for alternative mechanism of risk reduction (e.g involving its own management or experts).
Special challenge is to ensure financing on markets in distress or in times of overall economic insecurity, but if we go at the beginning and have on mind the premise of risk and return, and if we are talking about project which could ensure high yields or have a built-in mechanism through which the risk for the investor could be reduced, even then investments are possible.