 Financing
your own project
Getting finance for your
project will be the toughest obstacle you will
probably face. Finding financing takes persistancy.
You will need optimism, determination and the
patience to encounter dozens or more turndowns
and hurtles before you will find financing.
There are a number of reasons why it is so difficult
to obtain financing: You will be considered
a start-up business. Start-up businesses are
difficult to finance as the owners rarely have
track records. Banks and investors cannot turn
to any long-term statistical studies of success/failure
rates to assess their risks. If the business
fails, any equipment collateral on a business
loan will have minimal value.
Mortgage
financing - If your project will include
ownership of the real estate, than you should
be able to obtain partial financing based upon
the value of the real estate. The percentage
of this value you can borrow will be dependent
upon what the real estate and building (not
including equipment and special finishes) appraises
for based upon its alternate use should the
business fail and what the lender's loan policies
are. Even best case, don't expect to be able
to borrow more than about 70% of the real estate's
value.
Collateral
Loans - most banks will loan up to about
90% of the amount of liquid assets (CD's, bonds,
etc.) that you pledge as collateral.
Leases
- It is possible to lease equipment that is
considered movable and could be sold for use
in another facility.
Financing
for Larger Projects - Project types can
include entertainment, hotels, resorts, theme
parks, water parks, recreation, casinos and
other leisure facilities. Most sources requires
that you first submit an Initial Project Finance
Application form.
Most company startups turn to investors or partners
for their financing. Many people are initially
adverse to the idea of taking in partners. They
worry that they will not have control of the
business. Most investors are not interested
in being involved in the day-to-day management
of the business. They are interested in finding
mostly passive investments, which will generate
an annual return and possible appreciation of
the original capital. You don't have to own
more than 50% of the business to have management
control. Your business can be structured as
a Limited Liability Corporation (LLC), a limited
partnership or other legal entity, which grants
you management authority on all but major decisions
such as borrowing, major capital expenditures
and selling the business.
Having partners rather than loans
can be to your financial advantage. Your risk
is greatly reduced or eliminated. You are not
guaranteeing loans. It is no longer a question
of "Can you make the loan payments?"
but rather, "What will the return be each
year?" Most investors are successful business
people, so they are a great resource to draw
on for advice with the business. Moreover, it
is far better to own a percentage of a business
that gets open rather than 100% of a business
that never opens.
Most investors will want you
to have some investment in the business. This
gives them psychological comfort that you will
not walk away if things get tough. If you are
managing the business, you are entitled to a
management fee for your time in addition to
your share of ownership, profits and cash flow.
As a rule, if the project does not show a return
of somewhere between 15% and 25% on invested
capital, normally it’s recommend that
clients do not proceed. If your project includes
ownership of the real estate, returns will be
less. The reason is that real estate returns
are lower than leisure business returns, so
the real estate portion of the investment dilutes
the overall rate of return. To put it another
way, the market rental value of the real estate
will not generate a high return on the real
estate investment. Financing for the real estate
portion of the investment is more available,
however the overall return on the invested capital
in the entire project will still be lower. This
makes financing projects that own the real estate
more difficult, as investors will still tend
to look at the total investment as being in
the business operation, and expect a high return.
This problem can often be addressed by breaking
the project into two different companies, one
that owns the real estate and leases it to the
operating company, and the other that owns and
operates the business. Different investors are
then obtained for each company. Investors in
the real estate company do not expect high returns.
The return to the investors in the operating
company is not diluted, so you can attract investors
to that more risky company. It is always better
to lease the real estate if possible. This simplifies
raising money for the project, as the returns
are higher and less money is needed. We recommend
that you approach the least likely investor
or lender prospects initially. This will give
you a chance to learn the type of tough questions
investors ask, be able to rehearse your answers
for later investors, and revise your business
plan to address their criticisms. You'll be
up the learning curve and increase your odds
of success with the more probable investors
and lenders.
Your greatest personal risk will
be at the beginning stage of developing the
project, before you have secured loans or investors.
To secure either, you will probably need: a
site for the project, a market feasibility study,
a preliminary plan, detailed cost estimate,
attendance and per capita expenditure projections,
pro forma projections of revenues, expenses,
cash flow and after tax profits, details on
how the project will be marketed and managed,
and information on your background and experience.
These are all incorporated into what is called
the Business Plan. There are a number of good
books available on how to write a business plan.
Depending on the state you are located in and
how you structure the business to bring in investors,
you may also need some form of investment prospectus.
You should consult an attorney or investigate
the applicable security laws to determine this
requirement. To prepare and pay for the business
plan, attorney's fees and other initial expenses,
you could well need $50,000 or more in front-end
capital before you will be in a position to
seriously approach lenders or investors.
Some owners are not in a position
to invest this much front-end capital on their
own. In that case, one option is to find an
initial investor who believes in you and your
project and is willing to invest at an early
project stage in return for a greater ownership
percentage per dollar invested than later investors.
A good prospect for this initial investor is
someone who lives in your community, has interest
in bettering the community and sees your project
as bringing it a valuable amenity.
Where do you find investors?
They're everywhere. The problem is to locate
them. This is where perseverance comes into
play. You probably know some potential prospects,
or at the least some people who could steer
you to good prospects. Try your lawyer, accountant,
stockbroker, investment advisor, insurance agent,
doctors, etc. Often, it works better to approach
them indirectly by saying you have this investment
opportunity and you were wondering if they know
of any potential investors they could recommend.
In all, it would be safe to say
that for any project big or small: solid research,
perseverance and a few good contacts are essentially
your key elements to make your project succeed.
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