Business (Project) Financing In Industrial Feasibility Study

Finance is the most important problem facing an entrepreneur particularly when formulating an industrial project. In most cases, entrepreneurs have meager resources and are usually not in a position to attract finance from external sources. Very often, their main sources of fund are from the promoters personal savings, contribution from family members and sometimes loans from friends, business associates and other informal sources. Business finance is the provision of funds for the effective take off of a new project, expansion or diversification of existing ones and more often for the smooth running of the business after take-off as a going concern.

The requirement of funds for capital; expenditure is an investment on assets of tangible nature like land, building, plant and machinery, vehicles, furniture and other fittings and other utility equipment. The assets are acquired by the promoters for conversion of raw materials into finished products and for sale to potential and existing consumers in the target market. In addition, working capital or running costs is also required at the implementation stage and during the course of running the business to purchase raw materials and other production inputs.


As explained above, a prospective or existing entrepreneur obtain money to finance his project fro two broad sources. These are investment by the promoters and borrowing from external sources. The borrowing from external sources could be in form of loans, equity financing from banks and venture capital companies or equipment leasing.

Sole proprietors and partnership projects are usually started when the owner or owners invest cash and other assets in the business. Often, these investments by the owners are the primary sources by which the business is operated. The owners of a limited liability company invest in the company by buying shares when the company is formed and sometimes through later sales of additional shares which usually represent their ownership of the company. The past decade has also witnessed the emergence of venture capital companies in Nigeria whose main activity is the provision of equity finance to new and existing business.

Another source of capital is debt. Essentially this involves borrowing money, goods or services with the understanding that repayment must be made with interest and other charges by a fixed future date. Such financing is usually classified by the length of time before repayment is due. For instance, short term debts are obligations that must be paid back within one year, medium term debts are usually repayable within five years while long term obligations are debts due in over five years.

There are different institutions established by individuals, corporate bodies, government, bilateral and multilateral institutions to provide finance and other support services to new projects and existing businesses for expansion, diversification, backward or forward integration and so on. The functions and services provided by these institutions are explained below for the advantage of project promoters.

a) Commercial Banks.
Commercial banks are financial institutions established to provide short term finance for financing transactions which are self-liquidating over a short period of time. Specifically, they extend credit facilities to finance the purchase of raw materials and other inputs which are processed and sold within a short period of time depending on the operating cycle of the business. Sometimes, they also provide credit to business experiencing cash flow problems as a result of increase in debtors, seasonal fluctuations and the general financing of trade in saleable goods.

Very often, credit are extended to promoters in from of overdraft or short-term loan. The conditions for granting the credit vary from one commercial bank to the other. While some may require collateral before granting the credit, some may not. However, overdraft facility is the most common form of short term finance. They are particularly used to provide short term working capital to tide over productions cycle, to finance seasonal fluctuations and also to obtain bridging fiancé for acquisition of fixed assets. Overdraft facilities are granted for a short period of about one year with the possibility of renewal for further periods subject to the credit worthiness of the borrower. On the other hand, a short term loan is usually made for a specific purpose and is usually drawn down by the borrower for that purpose. Repayment is made on the agreed terms and interest is charged on the balance of loan outstanding.

b) Development Banks.
The rationale behind development banking derives from the existence of “gaps” in the financial system particularly the inability of commercial and merchant banks to provide medium and long term finance that necessitated the need to plug such gaps. The gaps arose from two main sources. The first is the tradition and inadequacy of the commercial banking arrangement. For instance, commercial banks ‘service” rather than “finance “industry and they traditionally finance working capital. They rarely concern themselves directly with the provision of long term capital. In short, it services “trade” and “commerce” and where industry exists, it merely services its “working capital”. Provision of medium and long term capital was thus neglected. It is under this circumstance that development banks are needed to, as catalysts, stimulate investments in and by the private industrial sectors and in making new skills and enterprise as well as capital as instruments of economic development.

However, there is a need to emphasize that development banks by their nature did not and do not emerge on their own. They are creatures of government. They are created because it was realized that development banks are particularly useful in providing medium and long term finance either from domestic sources or where the flow of finance resources from abroad requires, in most cases, government, guarantee is required, whether the loan is privately or publicly acquired. In the recent past, the Nigerian Industrial Development Bank (NIDB), the Nigerian Bank for Commerce and Industry (NBCI) and National Economic Reconstruction Fund (NERFUND) used to provide medium and long term finances to the small, medium and large scale industrial sector. However, these developments finance institutions were merged by the government to form the Bank of Industry (BOI).

Medium and long term finance is used for the purchase of fixed assets of fairly long life span such as plant, machinery and other fixed assets. Medium term finance is resorted to when the financing needs are large and would impose a strain on the discharge of debt obligations over a shorty period. This type of finance is obtained as loans secured against the assets of the business. These loans are given by banks generally against an appraisal of likely cash flows over the term of the loan and the promoters capacity, character and credibility.

Long term loans are also obtained as loans against the security of the company. The condition for granting such loans is specified in the loan agreement. Very often, when the security offered is not adequate or even when it is satisfactory, it is quite common to have additional security in the form of personal guarantees by the promoters of the business and other directors of the company. Generally, term loan carry fixed rate of interest and specific periods for its payment and that of the principal amount borrowed by installment. Approval of term loan is usually given after a detailed appraisal of the technical feasibility and financial viability of the proposed project, the market for the product or services, management and organization, the marketability of the assets against which the term loan is given, the cash flow and overall profitability of the proposed venture.

The repayment period for the interest and principal vary depending on the nature and type of project particularly the gestation period. In most cases, repayment of the loan by the promoters starts after a period of moratorium which is generally linked to the actual period when the project will commence operations and generate sufficient funds to meet its obligations. Sometimes, when the amount of the term loan is substantial, it is customary for the lending institution to safeguard its financial interest in the company. This is done by appointing or nominating a director from the lending institution to be a member of the company board of directors to participate in management decisions and to m0onitor the company’s activities.

c) Foreign Finance.
1. Bilateral and Multilateral Development Finance Institutions.
In industrial parlance, foreign loan is also referred to as offshore finance. The loans which are denominated in foreign currencies i.e. US dollars, British Pound Sterling, Dutch Mark, Italian Lira etc. can be accessed by project promoters through local and foreign development finance institutions (DFI) such as Bank of Industry (BOI), African Development Bank (ADB), World Bank (WB), International Finance Corporation (IFC), United States Export-Import Bank, Nigerian Export-Import Bank (NEXIM), the African Project Development Facility (APDF), Centre for the Development of Industry (CDI), Asian, Arab and other regional development banks around the world. The multilateral and regional development banks mentioned above generally prefer to deal directly with the Federal Government of Nigeria to provide the necessary guarantee through its agencies because of the foreign exchange involved to ensure that the loans are repaid by the borrowers. In the past two decades, the World Bank, African Development Bank and others have made such foreign currency denominated loans available to finance Small and Medium Enterprises (SMEs) in Nigeria through the defunct Nigerian Bank for Commerce and Industry (NBCI), the Nigerian Industrial Development Bank (NIDB) and the National Economic Reconstruction Fund (NERFUND). Presently, such loans could be accessed through the Bank of Industry (BOI) and the African Project Development Faculty (APDF).

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Project promoters can also access foreign currency denominated loan through buyers credit offered by the lender countries. Such credit tie down the use of the credit for buying machinery, equipment, raw materials and services from the country offering the credit.

2. The African Project Development Facility (APDF)
The African Project Development Facility (APDF) was established in 1986 by the International Finance Corporation (IFC), the African Development Bank (ADB) and the United Nations Development Program (UNDP). It was established to help African Entrepreneurs prepare business plans to secure financing for industrial projects. The APDF receives funding from these three sponsoring agencies and from the governments of fifteen industrialized countries including USA, United kingdom (UK), Sweden, Switzerland, Germany, Portugal, Norway, Japan, The Netherlands etc.

Along with helping entrepreneurs prepare bankable project documents, the facility also provides business development services to small and medium-sized enterprises (SMEs). In some cases, APDF also provides assistance with project implementation. Although, the facility does not finance itself, it works with project promoters to obtain financing from banks and other sources. About one-fifth of the projects assisted buy the APDF are financed by the African Enterprise Fund and the International Finance Corporation (IFC) special program for financing smaller projects.

3.The Nigerian Export-Import Bank (NEXIM)
The bank, which was established in 1991, provides the following services to entrepreneurs:
a. Provision of export credit guarantee and export credit insurance facilities.
b. Provision of credit in local currency to entrepreneurs in support of exports.
c. Establishment and management of funds connected with exports.
d. Maintenance of a foreign exchange revolving fund for lending to exporters who need to import foreign inputs to facilitate export production.
e. Purchase and sale of foreign currency and transmission of funds to all countries.
f. Provision of investment guarantee and investment insurance facilities.

Since the inception of the bank, it has provided facilities for entrepreneurs in trade finance, project finance, treasury operations, export advisory services, market information, exporter education and other guarantee geared towards export.

4. Centre for the Development of Enterprise (CDE)
The Centre for the Development of Enterprise (CDE) based in Brussels, Belgium is also a source of funds for financing projects for entrepreneurs in African, Caribbean and Pacific countries (ACP). The Centre is an ACP-European Union Institution financed by the European Union Development Fund (EDF) under the Lome Convention.
Its main objective is to encourage and support the creation, expansion and restructuring of industrial ventures mainly in manufacturing and agro-allied industry in the ACP countries. It promotes partnerships between ACP and European companies with assistance in financial, technical and commercial partnership including managerial contract, licensing or franchise agreement, subcontracting and so on. The center’s services which are easily accessible, are provided for business creation, expansion and rehabilitation of industrial projects through its antenna and other representatives in African, Caribbean and Pacific (ACP) COUNTRIES.

The most attractive feature of CDE’s intervention to project promoters is that the most of its services are provided free of charge by using its own expertise or by making a non-reimbursable financial contribution. However, the CDE does not directly finance industrial projects but helps to seek out and put together a financing package. Industrial projects are evaluated by CDE on the basis of financial and technical viability and their contribution to the development of ACP countries.

d) Equity Finance
Equity finance which is a recent phenomenon in Nigeria is also referred to as Venture Capital. It is a process whereby a financial institution provides or arranges the funding of a new project, an idea or concept capable of turning out to be commercial viability. Such business or idea may be new or partially crystallized. However, venture Capital firms usually have equity holdings or shares in the projects they promote. They do not loan money. They invest in the new project or participate in expanding or diversifying an existing one and become part-owner in the business. Usually, they sell off their equity or shareholding after they might have made appreciable gains either by way of dividends, profit sharing or capital appreciation. They do this to replenish their stock of investible funds. By its very nature, Venture Capital is a risk finance for funding industrial projects which for a variety of reasons, are unwilling to take long-term loan due to the high interest rates or raise finance in the public or quoted capital markets. This inability of project promoters to access the capital market may be due to size, stage of development, degree of coverage or the nature of the company. As stated earlier Venture Capital or equity financing is mostly targeted at companies with very high growth potentials and usually include instruments convertible into equity shares, preference shares or debentures which are convertible to equity.

In the past decade, Nigeria has witnessed the emergence of the National Risk Fund, which was established by the Raw Materials Research and Development Council (RMRDC) through joint efforts of some banks, industries, insurance companies and other high net worth individuals. The fund was set up to meet the long term capital requirements of the industrial sector in Nigeria by providing equity finance and services to economically viable and financially profitable projects.

In the same vein, the Bankers Committee, which is the apex body of Commercial Banks Chief Executives in Nigeria has also established the small and Medium Industries Equity Investment Scheme (SMIEIS). The scheme is a voluntary initiative which requires all commercial banks in Nigeria to set aside ten percent (10%) of their Profit Before Tax (PBT) annually for equity investment in Small and Medium Industries (SMI’s) involved in the real sector of the economy. The objective of the scheme is to reduce the burden of interest and other financial charges expected under normal bank lending as well as provide financial, advisory, technical and managerial support to projects and their promoters to accelerate the growth of the real sector of the economy. At present, the investment ratio is 60% to 40% by promoters and banks respectfully.

Although the economy is yet to feel the impact of the scheme, it is pertinent to note that more than twenty billion Naira of investible funds have been set aside by more than seventy commercial banks in Nigeria as at the end of December 2003. While some of the banks have established separate departments or units to manage the scheme, a few banks have also formed a consortium with other banks or appointed venture capital managers to manage their funds.

e) Equipment Leasing.
In the recent time, leasing an equipment or an asset such as machinery, plant, vehicles etc. has become a more popular alternative to purchasing. Leasing is a practice of renting an asset by leasing it for use by a business venture with or without the option of purchasing or owning the asset at the expiration of the lease period. The lease period is usually between 3-7 years which is very often in accordance with the anticipated working life of the leased asset. During the lease period, the capital cost and the service charges are recouped by the leasing company. The Equipment Leasing Association of Nigeria (ELAN) is the apex body for all companies involved in equipment leasing in Nigeria. In formulating and establishing an industrial project, promoters should also explore the possibility of leasing rather than buying a piece of equipment so as to reduce the initial huge payment for such equipment and its impact on the cash flow.

From the foregoing, it is evident that project promoters have different financial options when establishing a new project, expanding or diversifying an existing one. For the purpose of emphasis, it should be noted that whatever financing option is chosen has a direct impact on the future cash flow and profitability of the project. Extreme caution should therefore be taken in deciding the mix between debt, equity and leasing. In taking the decision, promoters should consult with experts who will analyze the future potential impact of the financing options on the profitability and growth of the business.

One thought on “Project Financing”
  1. […] Project Financing Plan. The promoters’ equity contribution to any one project varies from one development finance institution to the other. Generally, it should not be less than 30% of the total capital costs of the project. The purpose of this is to reduce the principal and interest repayments burden and its effects on the future cash flow of the business. […]

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