Greenhouse Canada

Business Management
Special Series: ‘Show me the money’


December 29, 2010
By Reg Renner

Topics

The number one stumbling block for a Canadian bioenergy project is a lack of adequate financing.

The number one stumbling block for a Canadian bioenergy project is a lack of adequate financing.

3747-Biomass-fuel
One financial specialist recommends finding a secure 10-year wood fibre supply agreement.

Advertisement

Previously, I’ve discussed the importance of a vision and a functioning
team, but without adequate equity and capital investment, the dream
could die. Credit strength questions are often left until the end of
the project, with the hope that it will come together somehow. I’ve
seen elaborate business plans without even a simple pro forma income
and expense spreadsheet. Often there is no construction budget, cash
flow timeline, or detailed breakdown of income sources. To launch a
successful bioenergy project, you must start with a solid financial plan.

3747-Biomass-storage  
For a bioenergy project to be successful, you must focus on the need for financing during the early stages of business plan development.


 

In the movie Cool Runnings, a Jamaican bobsleigh athlete asks his bank
manager to sponsor his dream of competing in the winter Olympics. The
bank manager cannot contain his disbelief and skepticism, and breaks
into uncontrollable laughter. Fortunately, the movie is a comedy, but
if you have been working in bioenergy for long, you know the feeling.
We may like comedy, but we hate rejection, so we often procrastinate
and avoid this difficult, yet vital, task.


MAKING YOUR BANKER A BELIEVER IN YOUR PROJECT

Bank managers are not the enemy; they are the guardians of our savings
accounts and are paid to evaluate and minimize risk. So let’s look at
what’s required to arrange financing for your project, rather than
complaining about the bank’s lack of vision.

You may only get one chance to impress an investor or lender, and that
person is faced with numerous projects vying for investment dollars.
Which of those projects would you pick? The professional answer is: the
one that has the least risk, the most available cash, and the best
financial plan. You cannot walk in with no off-take market agreements
and no money in your back pocket and expect someone to write a cheque
based on your enthusiasm for the project. Think about why so many
announcements are made and so few bioenergy projects are actually built.

A bank manager told project developers attending a recent bioenergy
conference that “you need a secure 10-year wood fibre supply agreement,
an off-take market agreement for five years at 80 per cent of
production, proven cash flow, and 60 per cent equity.” He later told me
that he was trying to chase away the “tire kickers.”

I have worked with this lender before and know that he would consider
projects with lesser qualifications. However, your project needs to be
prepared for that level of scrutiny. I can guarantee that a lot of
prospective bioenergy groups went home discouraged that day; the lesson
is that you need to be thoroughly prepared before you approach a
potential investor or lender.


RAISING SUFFICIENT MONEY MAY BE YOUR BIGGEST CHALLENGE

For a bioenergy project to be successful, you must focus on the need
for financing during the early stages of business plan development. Map
out a strategy on how to raise sufficient money. This may be the most
difficult part of the project.

There are several key components to creating a solid financial plan and
attracting potential investors and lenders. Ask yourself the following
five questions.

1. How much cash am I prepared to invest? The easy answer is, “the more,
the better,” but realistically, a target of 25 per cent of the project
costs is a good place to start. You may need to share the equity risk
with other partners to get there, but it’s better to deal with this
issue up front, rather than being told later you don’t have enough of
your own capital in the project to qualify for financing. These days,
getting 95 per cent project financing is near impossible. The more
money you have available, the lower the perceived risk and the greater
the chance of getting the project financed under attractive terms.

2. Do I have relevant business experience? If, for example, you have
never made a biomass pellet or you have no wood harvesting experience,
this issue needs to be addressed. The goal is to minimize risk and
stand out in the crowd of bioenergy project developers. If your skill
set is lacking, try to find a team member or committed business partner
who can fill the experience gap. The people involved are very
important, as it’s up to them to deliver on the business plan.


CONSIDER A JOINT VENTURE AS A FUNDING OPTION

3. Do I have a related company with strong credit that can offer
support?
This could make a huge difference in how the project is
perceived, as it shows successful business experience and a willingness
to put your proven expertise on the line. It is extremely difficult to
arrange financing for a bioenergy project that does not want to have
its parent company back it or its owners sign personal guarantees. If
you are a start-up company with no parent company backing and limited
cash resources, you should be prepared to look outside of traditional
banking and consider joint ventures or other creative partnerships to
access capital.

4. Do I have a financing advisor? Experienced project developers
know it’s a good idea to pay for feasibility, engineering and market
studies, and they also realize the value of financing advisors. A good
broker/advisor searches for project funding from numerous sources and stays current with the
latest financing developments. As a new industry, bioenergy financing
can include numerous options, depending on credit strength, project
size and company history. An experienced financing advisor can help you
sort through the options and point you in the correct direction while
minimizing time wasted.

5. Do I have a spreadsheet-based financial plan that can model different
scenarios?
With a computer-based spreadsheet, you can make quick and
accurate changes to your financial plan based on any “what if”
questions or changing feedstock and market conditions. One project I am
advising on is on the ninth version of its financial plan, which
remains accurate for today’s inputs and market conditions because it
was built to model different scenarios quickly and easily. Your plan
must be accurate to make it to the top of the investor’s list, and the
ability to make quick changes based on market developments shows a high
level of sophistication to a potential lender.


GOVERNMENT GRANTS ARE NOT EASY TO GET

I have not yet mentioned government funding, but that is not an
oversight. Far too many project developers are chasing government
grants in the hope of securing the additional funding needed to turn a
project into reality. In truth, accessing government money is a
time-consuming process and, if you qualify, the money often comes after
the project is complete, not during the construction phase when it’s
really needed. Grants can help, but they’re not the easy money many
people believe they are.

You can be a start-up company with minimal cash, but you must have a
thorough financial plan that includes income and expenses, cash flow
projections, and a construction budget. It is also a good idea to work
with a financing advisor who can get your plan to the right people.

Remember, if it were easy, everyone would be an Olympian. When
discussing your financial plan, team and vision, keep in mind that
potential investors and lenders are looking for shared risk and good
credit strength. Start building your credit strength now.


Reg Renner of Atticus Financial in Vancouver finances equipment ranging from biomass boilers to greenhouse structures. He has 38 years of horticultural experience. • rrenner@atticusfinancial.com


Print this page

Related



Leave a Reply

Your email address will not be published. Required fields are marked *

*