Picture a young company selling a new but (somewhat) proven technology, with weak financials characteristic of this stage of development. Maybe that’s you or someone you know? Such a technology provider is likely struggling with these two pressing challenges:
1.-The company cannot raise debt, as it lacks proven financial performance and probably the balance sheet strength necessary for a favourable assessment of its creditworthiness. Due to the technology’s larger size, it may not be feasible for the company to finance growth through equity.
2.-Despite having a number of smaller, equity-financed versions of its technology operating successfully in a commercial setting (where they are economical), the manufacturer may require revenues from the sale of larger, scaled-up versions of that technology to strengthen its financial position. The company may have difficulty attracting clients that are prepared to take this scale-up risk, and even if it does attract such clients, the company may find it challenging to obtain the required purchase order financing.
What’s the solution? Project financing may be just the answer to this emerging manufacturer’s predicament. Project financing can be a tool to bridge the development gap from smaller, earlier-stage companies to cash flow positive project developers and technology manufacturers.
To attract project financing, the company will have to create a unique project with a specific project life. Such projects are self-contained and, hence, easier to assess by a lender than an early-stage company with its many unknowns. Also, the project’s creditworthiness can be influenced favourably by securing high quality supply agreements, offtake agreements, project management, and service providers.
As seen in the wind and then solar industries, manufacturers had to become developers of projects for a period of time during their earlier stages of development, using their own technology to demonstrate its operating quality and efficiency, and, consequently, to create demand and grow the business. Subsequently, they started to be able to attract debt financing directly and then, in many cases, they withdrew from project development and focused on manufacturing only.
If the project is of critical mass and it meets the key requirements for project financing (such as experienced management, reputable service providers, proven technology as well as long-term supply and offtake agreements with creditworthy parties and for terms that are at least as long as the term of the debt) money can often be raised. Depending on the type of technology and further financing opportunities, the required project debt will likely have to amount to at least $5 – 10 million.
For more detailed information about project financing, see the book I wrote: The Decision-Maker’s Guide to Long-Term Financing – available at www.guidetolongtermfinancing.com.