Don’t Let a Financeable Asset Go to Waste
There is a niche form of financing many small- and medium-sized companies don’t realize they have access to allowing them to tap into the same financial markets municipalities and large corporations use every day. Understanding how to structure this financing allows small- and mid-sized companies to capitalize on assets they never realized the true value of.
Try going to the conventional financial markets and see what’s available in the project finance arena. Not much, is there? Even if you are lucky enough to have access to something, is it attractive? Chances are, unless you are well capitalized already (and therefore may not need financing), the debt markets will require a substantial equity position if not a majority position by the borrower, and the equity markets will require controlling ownership of your company.
There is a niche form of financing that has been around for decades but is commonly overlooked as a source for project finance. It solves many of the problems faced by new and established companies in virtually all industries because it is not based on the strength of the borrower, the underlying assets or the revenue projections of the project. It is based solely on the strength of future revenues, future capital commitments, or other monies coming into a company from credit worthy companies and municipalities.
There are some lenders that consider a company’s most valuable assets to be not their physical assets, but their relationships with the municipalities and other investment grade rated companies they do business with. When access to financing of this nature is not fully utilized, the opportunity to tap into financing that doesn’t require giving up equity; requires little due diligence and therefore has a very quick timeline to funding; does not take first position on assets; and doesn’t impose covenants or restrictions on uses of funds, is wasted. Why is that important? The ability to use a different asset as collateral opens up doors even to companies with encumbered physical assets and companies without physical assets.
How Does This Work?
It’s actually very simple in structure. Let’s say a city’s landfill is reaching capacity and dumping into a neighboring municipality’s landfill comes at a steep price. The city is not in the position to build a new landfill or self-fund a recycling and/or waste conversion solution. Enter a waste-to-energy (WTE) company with the capability to build and operate an integrated solid waste management system, but doesn’t have the funds necessary to do so. By entering into the right agreement with the city, the WTE company can fully fund the project without giving up equity, without recourse and without having to have strong credit. Funding can also occur as soon as the contract with the city is finalized, regardless of permitting or stage of development. The city solves their waste dilemma without coming out-of-pocket, without raising bonds, and without hurting their own credit. All while saving money on tipping fees, creating jobs and doing their part to help their state meet the requirements of their renewable portfolio standard.
The applications are endless. As long as there is a motivated, credit worthy entity involved in the transaction, there may be a way to incorporate this credit-based financing into your capital stack. Financing is not only available for new projects, as illustrated above, but for any company with a contractually obligated future revenue stream.
Take a waste hauler who for years has been contracted by a county to collect and transport the county’s waste. In order to save money on fuel costs the waste hauling company wants to convert their fleet into hybrid vehicles. Instead of asking the county to fund the technological conversion, or self-funding if possible, the waste hauler could use their contract with the county as collateral for a loan covering 100 percent of the costs. This would not only increase the waste hauler’s bottom line, it may also cut down costs to the county.
Is This Accounts Receivable Financing?
No. Accounts receivable financing is based only on invoices due. You’ve already performed your end of the contract and you’re looking for money now instead of waiting 30, 90, 120 days. Accounts receivable financing is short term and typically relatively small in denomination. The collateral here is not invoices due, but future contracts on which either party has yet to perform. Financing based off of future revenue streams also has a much broader and longer scope. Institutional lenders who participate in this sort of financing look to place at minimum multi-million dollar loans for multiple years.
Why Would Anyone Fund My Company Without Taking a Lien on Assets or Equity?
The type of debt financing most small- and medium-sized businesses are accustomed to is asset based. The underlying value for these lenders is the assets the borrowing company and sometimes the general partners of the borrowing company have. The type of debt financing most large corporations and municipalities are accustomed to is unsecured. Using their good faith and credit alone, they can borrow either publically through the bond market or privately through institutional lenders at low rates without tying up their assets as collateral.
By combining the good faith and credit of these larger companies and municipalities with the financing needs of companies they do business with, these smaller companies can gain access to the unsecured debt market that, otherwise, is out of reach. The benefits of this are substantial. Since the institutional lender does not want to and cannot take over your company and assets, that leaves all of the control and flexibility in the hands of the borrower. Financing is offered at institutional rates and first position is left available for other lenders. Therefore, not only can this financing tool finance a project fully, it can also replace the equity portion of your capital stack and leave the opportunity available to apply for equipment financing.
Why Isn’t Everyone Doing This?
It does not apply to everyone. Without an investment grade rated entity willing to enter into a long-term future commitment with you upfront, you don’t have the adequate collateral. Also, access to financing through local banks is easier and more evident than access into Wall Street. Because unsecured, institutional lending does not apply itself naturally to the small- and medium-sized businesses, it takes a certain level of expertise in that financial sphere and an understanding of the very different parameters to acquire this financing. But with banks tightening their funding parameters, even companies who have long-term business relationships with their banks are being denied and alternatives are required.
This isn’t the magic ticket to solve all the financial problems companies face today. Mainly, the two issues just mentioned—the ability to obtain the proper collateral and access to the right institutional lenders—keep many companies out of the playing field. But the attractive nature of the terms and structure of this financing makes it a very valuable financing tool for companies capable of acquiring it to keep in their toolbox.
Rachael Maltese is a managing partner at Greener Earth Financial Solutions, a firm with access to the capital of several major North American insurance companies and pension funds. Although Greener Earth’s scope is industry and location agnostic, they specialize in renewable energy, energy retrofitting, and other sustainable and green processes located in the Americas and Western Europe. Rachael can be reached at (239) 597-0010, ext. 3, via e-mail at [email protected] or visit www.greenerearthfinancial.com.