Monday, 15 August 2016

Fees and Costs - Project Finance

Now that you have your business ready for funding, you probably want to know about paying fees and costs for a big project? Many businesses refuse to pay upfront fees and exhaustive list of charges but the biggest question is;

What exactly might you expect to pay?

What Fees Might You Be Asked To Pay - Project Finance

There are many costs and fees associated in project finance so it is always important to ask exactly what you are paying for. (This article we explained the differences between fees and costs). Keep in mind that if you apply for funding from a traditional loan company, it's probable that they will lend up to 70%.

You may ask why should you pay to get funded when applying for a loan? Well there is always a cost to doing business. If you have ever applied for a mortgage, its most likely you had to pay for other fees on top like; agent fees, admin fees. There is no "free" when applying for finance, there is always some kind of cost. (Thinking about it, I'm trying to think of something I received for free) To those who state you can get 100% finance, it is likely will still have to pay costs. Otherwise they probably charge an extortionate interest rate which is risky for a new business or they demand a high proportion of your equity. Just bear in mind that if they do take a high proportion of equity, this may not suit your business model in the coming years. Especially as you are applying for debt finance initially.

The most common reason why entrepreneurs refuse to pay fees is because they have no "skin in the game". (Scroll down to the bottom of this page for more information about 100% project finance)

You will most certainly find an explanation of the fees when you are given the loan and security agreement (LSA) from the funder. Here we highlight just a few that we've come across - please note that the list is not limited to what is outlined below.

Facilitator's Success Fee

This is a fee that is payable upon successful project funding. This is normally paid out of drawdowns. It is normally a percentage of overall funding requirement.

Funder's Structure Costs

Some funders (not all) will have a cost to set up and structure your loan. This is an amount which is determined by the funder which is dependent on the loan size, type of structure, how much risk ..etc..

Retainers

This is a contract whereby the borrower agrees to pay the facilitator an ongoing retainer for their services.

Due Diligence

This is a cost the funder charges for doing due diligence on your project.

Appraiser Fee


This is paid to a third party to do an independent appraisal on the project.

Feasibility Study


The study is made by an independent firm to evaluate the feasibility of the project. Most funders will ask for this IF it's required.

Other Funding Costs:


Equity share - This is a percentage of the profit that a project generates as part of an overall funding package.

Top tip: Focus on the value and not the cost when it comes to paying fees in project funding.

100% Project Finance

If you require 100% project funding, there are a few things to consider. We understand most project owners do not wish to pay "upfront fees" but in reality there will be costs involved such as those itemized above. If you are needing a substantial loan and not prepared to pay ANY costs remember it's the funders that are taking on the most, if not all of the risk.

A willingness to contribute something towards your funding requirements puts you in good stead. Contributions such as placing your own equity/collateral etc., is otherwise known as having "skin in the game". If you can contribute some skin in the game then this would bode well with the funder and reduces their risk. For example if there is collateral available which can be ceded to the funder throughout the duration of the loan, this will inevitable protect the funder further down the line if a default were to happen.

Please note that in reality 100% funding is difficult to come by. Most funders will require at least SOME cash equity and then provide you with the balance in funding.

We have a range of funders' from investment banks, hedge funds and other private investors on our books. They can do 100% finance without some kind of cash equitybut in return they would want a stake in your business. This could be up to 90% equity stake which may not be suitable for you in the future. What may help you cause is to get some seed investors first THEN apply for funding.