There are many different ways to get your business funded or project financed; either locally or internationally.
It is more easier and much cheaper to get your project financed by way of Project Finance, using the project as the means of assets for financing. Project assets including the equipment, technology, manpower, land, tax incentives, market opportunity and future income projections.
There are three different types of financing; debt (loan to the project which must be repaid), equity (taking part ownership in the project), or mezzanine financing (a combination of both).
Mezzanine financing is better because you can structure it to be may be, 40% debt and 60% equity. For the equity, there’s usually an exit strategy, meaning that, a period of time the investor will hold a certain percentage ownership of your project, until his money plus interest is repaid, and when it is repaid, the investor exits the project and returns the equity he has held back to the project. In this, the investor also takes a Board seat, and makes decision of the project based on his Board voting power. For the debt financing, this is a loan which must be repaid back after a certain period of time. In debt financing, the financier uses the project’s assets as the collateral. This is a straight out loan but it may come with certain conditions, but it doesn’t take a Board seat and doesn’t make company’s decision. However, it might be expensive in repaying back the loan depending on how you’ve agreed in your debt term sheet.
At Groot, we prefer the mezzanine financing using project financing. However, we are mindful of the costs of the financing. International financing agencies such as IMF, EIB, and local and international development banks are usually the most easiest for financing. However, there are other financing vehicles such as privately-held Venture Capital firms which generally pour millions or billions of dollars in projects or businesses on equity basis.
For a project to get financing, it must offer great appetite for investment based on various factors; is the project feasible, is the project sustainable, does the project have market potential, how easy is entry to market for the project, how big is the project’s market base, and the most important of all, is the country in which the project is located politically and economically stable? Has the project received all the required permits, has the government offered its blessings for the project’s development and implementation, etc.
Not many entrepreneurs in the world use their own money to finance their businesses/projects. OPM, other people’s money, is the best method to start and finance your business/project.
In Africa, can you get your business or project idea easily financed?
Should I go on?