Knocking on the Dollar Door: 5 Do’s for Raising Project Finance
DO prepare a Business Plan. Have it written, or at least checked, by a professional. It is easy to overlook key items, or include basic mistakes, that your banker will catch at first reading. Be conservative in your financial projections (“don’t count your chickens before they hatch”).
DO know – and map – your Value Chain. Understand the critical points in the supply chain upstream from your business. Make sure you understand who your competitors are, and how much threat they may pose to your success. Downstream, prepare your customer base, understand what they need and when and at what price. Then draw a SWOT (Strengths, Weaknesses, Opportunities and Threats) diagram to visualize where the risks and opportunities are situated.
DO explain to your banker/funding source how your process works. Remember, financiers study finance, or accounting or economics, so don’t expect them to understand fish or chicken feed manufacturing or protein-starch digestibility in young children. Take the time to explain what equipment you want to buy, from whom, and how it works. Your banker may learn that you are not planning to buy the cheapest equipment on the market, and he has the right to ask why. If necessary, ask your equipment supplier to provide literature, or even have him come and explain to your banker face-to-face.
DO remember that few investors are willing to risk their money on a start-up. Your banker has many options where to place his spare cash. He can buy government bonds yielding respectable interest with no risk, and go home after lunch. Why should he put money into a new company that has no track record, and risk his reputation if the project goes sour? If you are a start-up, make sure the management team is experienced and knowledgeable and explain this to your banker. Or start small, at entry-level capacity, begin generating profits and next year return to your bank for a loan to expand capacity.
DO knock on every possible Dollar Door. A dollar door is an institution that may lend or even give you money. Here’s a quick list:
- Commercial Banks: find out which banks are lending to similar businesses in your sector, this will improve your chances of finding a bank that understands your business.
- Private Equity Funds: today, every investment house must have an ’emerging Africa’ fund; many claim they will invest in agribusiness and ‘enhance food security for millions’… In most cases, these guys only want to lend money to established companies, preferably the Africa branch of a multinational, with guarantee from mother hen. Minimum investment is usually $1 million, sometimes $5 million. Start-ups: ‘don’t even call us please’. These funds will be looking at the strength of your management team and well as your balance sheet. Human chemistry is as important to financial returns – you will be taking a marriage partner, not a loan.
- Development Funds: NGOs, foreign governments, multilateral funding agencies like African Development Bank or IFC, all have money to lend, sometimes in the form of a grant. Many want to invest in projects that bring social, as well as financial, returns. Easy to show when you are buying crops from local farmers and selling food to local consumers.
- Family: in today’s globalized world, most of us have family members living in faraway lands. These family members often want to invest ‘back home’ in ways that will benefit immediate family, or provide jobs for children and grandchildren.
Above all, you will need stamina and optimism. Raising finance for SME agri-processing is a marathon, not a 100 meter sprint.