Similar to Contract Financing, Project Financing provides access to working capital and commercial lending by using the proceeds from an upcoming project or an event as collateral. The difference, however, between Project Financing and Contract Financing is that Project Financing relies on progress payments being made throughout the term of the project while Contract Financing is paid in a lump sum.
Project Financing is very similar to Contract Financing in that it allows a company to obtain a loan based against a confirmed project and contract. In a Project Financing Loan, the loan proceeds are dispersed based on the project milestones, which enable the borrower to receive the liquidity they need throughout the completion of the project timeline.
Project Financing creates an innovative capital structure, which provides a company with the benefits of a traditional loan, but with more flexible underwriting requirements. Many companies that may not qualify for traditional commercial loans are able to receive Project Financing.
How It Works
Contact Abington Emerson Capital when you determine that additional capital is needed for your business. We will require you to provide us with a comprehensive business plan, documents concerning the legal formation of your company, and your company’s financial statements. Our evaluation will be based on your revenue projections, the quality of the project, and the company’s track record and expertise in the industry.
Once we understand the company’s current and future cash flow situation, we will prepare an agreement with the loan repayment terms. At each payment date, revenue will be split between you and Abington Emerson Capital, based on the terms of the agreement.
Scenarios Where Project Financing Can Help
Project Financing can be an effective financing tool for companies in a variety of industries and stages. It provides short-term capital to companies that may not be able to access traditional commercial loans or that face other liquidity challenges. There are many scenarios in which Project Financing may be the right choice for a company. Project Financing can assist companies that are looking to:
Expand Products and Services or Enter Markets
Project Financing can help you significantly grow your business by giving you access to capital that you need to capture more sales. This can mean expanding your products or services, entering new markets, or extending your geographic reach. Because project financing is based on the expected cash flows from your new business growth, it can often be a much more flexible financing tool than traditional small business loans.
Make Improvements or Upgrades
Service businesses often find that there are specific improvements or upgrades that can significantly increase their growth, but they lack the capital to make the needed investment. Project Financing can help a service business make these types of improvements or upgrades. A Project Financing loan is based on the future cash flows generated by the improvements or upgrades, which allows many companies that might not qualify for other forms of financing to gain liquidity. A services-based company that can identify specific improvements or upgrades that will generate additional revenue may benefit significantly from Project Financing.
Unable to Access Traditional Financing
For companies with impaired credit, or, for other reasons, are unable to access traditional financing, Project Financing can provide a flexible and convenient way to access capital. Because Project Financing is based on future cash flows, the company’s credit history will not prevent them from receiving a loan. This can be particularly beneficial for companies that are going through a turnaround, or that have experienced a significant business disruption.
Unable to Attract Investors
Small businesses often have a challenge attracting investors. Even if a business is profitable, investors may not be interested in participating based on the size of the company. Project Financing can provide these types of companies with needed liquidity. This added liquidity can play a key role in helping small business grow to a point at which they can attract future investment.
Companies that develop a project after receiving a contract from a buyer can often benefit from Project Financing. Project Financing allows a company to borrow against future cash flows; enabling the company to gain the liquidity it might not otherwise have access to. This can give the company the capital it needs to develop a project, even while in development, as long as they have a secured final contract.
Who Can Benefit from Project Financing
Any entrepreneur who may not have the credit history, meet traditional lenders’ time-in-business requirements, or the financial performance to borrow from a bank can benefit from Project Financing. It also is ideal for companies that need liquidity, but do not want to dilute their company by raising money from an outside investor.
Some common types of businesses that could benefit from Project Financing include:
Government contractors are prime users of Project Finance. They often have large projects where they need to purchase materials, hire subcontractors and begin a project long before they receive substantial payments from the contract. Project Financing can help government contractors maintain liquidity in the project life cycle by providing the capital necessary to invest in materials, subcontractors and other necessary elements as the project moves forward. The Project Financing lender will work with the government contractor to provide capital where the government contracting entity’s disbursement schedule for the project does not meet the project’s actual capital demands.
Companies that plan and produce large events can also benefit from Project Financing. These businesses often need to hire staff, pay deposits and make other arrangements in advance of receiving payments from their clients. Project Financing can play a key role in addressing an event planners cash flow needs. By providing liquidity when the initial contract is signed, Project Financing can provide event planners the resources they need to make their event a success.
Professional Services or Products
There are many other types of businesses that can benefit from Project Financing. Any business that is providing a service or is delivering finish goods and has a signed contract may be able to obtain Project Financing. By easing the cash flow demands of a large project or order, Project Financing can allow a professional service company or the producer/seller of a product to take on a new project or order it might otherwise have to turn down. Whether cash flow demands come from an expectedly large order/project from a current customer or an order/project from an entirely new client, Project Financing provides the cash flow a company needs to manage its liquidity. This allows the company to serve its customers better or to grow its business and eases the capital constraints that can limit a company’s business expansion.
Is Project Financing Right for Your Company?
There are many small and midsize companies that can benefit from Project Financing. Understanding when your company should utilize this unique liquidity and financing tool can make a significant difference in the growth, profitability and long-term value of your company.
There are several key questions a business owner can ask to determine if Project Financing might be right for their company. These include:
- Do you have a signed/guaranteed contract from a known and reliable customer?
- Are you experienced in your field and do you have a successful track record of delivering for your customers?
- Does your new contract require significant capital and place liquidity demands on your company?
- Is there a defined period by when you need to finish the project or deliver the goods and when the contract will be paid?
- Is the contract profitable with margins in excess of 20%?
These are just a few of the factors to consider when assessing whether or not Project Financing is right for your company. Abington Emerson Capital can help you determine whether or not Project Financing is an appropriate tool to meet your liquidity needs.
The decision to apply for a loan should be made after careful analysis and consideration of the current and future financial performance of a company. You must be confident that your company will generate enough revenue in the future to cover your expenses and make loan payments. If you do apply for a loan, take the time to understand every term and condition of the loan. You should never hesitate to ask your lender a question.
In considering Project Financing, it is important to fully understand the range of risks involved in the transaction. This can include factors such as the supply chain, shipping delays or disruptions, or buyer counter-party risk. A Project Finance lender will review these and other characteristics of the future cash flows to determine if the company is an appropriate candidate for Project Financing.
Remember, the most productive loan is one that helps your business grow.