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Tips to an entrepreneur seeking project financing

Prior preparation on the project

  • The entrepreneur would need to finalise the kind of project and the requirements in terms of civil infrastructure, equipment and utilities. Additionally, groundwork is also required in assessing the market potential and marketing channel to be adopted for marketing the products.
In case of medium size projects, the entrepreneur may decide to engage the services of an expert consultant for conducting market surveys and for lending a professional touch to the report. It is however essential to engage a reputed consultant for this purpose.


Interaction with financing agencies

  • Choose the financing institution that you would want to approach.
    • Institution with which you (or a close relative) have a prior dealings (or track record)
    • The institution must be financially sound
    • Pricing and service quality of the institutions
  • Understand the formalities and procedures beforehand

    • A number of formalities and procedures are involved in availing project finance and working capital finance from banks and Financial Institutions. It is essential to be aware of the same before hand. This would provide the entrepreneur with an assessment of the time frame for such availing finance. In the event of his likely inability to fulfill any of the conditions such as furnishing collateral security, etc. this would also indicate the futility of persisting with the particular financing institution.
  • Budget adequately for promoter contribution
The promoter would have to contribute both for financing the project (in the form of equity). However the project cost as assessed by the financing institution and the working capital requirement as assessed by the bank often tend to be lower side. The excess over such assessment would have to be fully incurred by the promoter.

For instance,
The project cost for a particular project may have been pegged at Rs. 100 lakh comprising the following:
 
Project cost Components Financed by
Land and building  Rs. 25 lakh  Promoter’s equity  Rs. 40 lakh
 Machinery  Rs. 50 lakh  Loan from financial institution Rs. 60 lakh
Margin money for working capital  Rs. 15 lakh
Pre-operative expenses  Rs. 5 lakh
Contingencies for escalation  Rs. 5 lakh
Project Cost  Rs. 100 lakh  Rs. 100 lakh

However, conservative assumptions by institutions may result in the following deviations in actuals:

  • Additional expenditure on civil works: Rs. 5 lakh
  • Additional expenditure in pre-operative expenses by Rs. 3 lakh for securing speedy clearances
  • Additional expenditure due to escalation of equipment costs and costs incurred in installation of machinery and commissioning: Rs. 5 lakh
  • Actual requirement of working capital Rs. 80 lakh; Working capital requirement assessed as per bank norms Rs. 60 lakh. Excess contribution towards working capital Rs. 20 lakh.
Total escalation in project costs Rs. 13 lakh (Rs. 8 lakh after utilizing the Provision for contingencies)
Increased Promoter Contribution for Working Capital Rs. 20 lakh
Additional funds required to be brought in: Rs. 28 lakh (assuming Working Capital is fully required upfront).
Such situations could lead to the entrepreneur being required to invest often even 50% higher amounts that his contribution as per the assessed cost of projects.

Evidently, it is better to anticipate these in advance!

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