The world and the bank’s balance sheets are always full of projects and bad loans. And then there are the Sustainable Projects or the Speculative ones.
Sometimes the ideas presented to the financier are debatable from the start. Way ahead or behind of its time. With no market prospects. Without a capable sponsor. However, most of the times, they were great ideas, creative and, at first glance, they had everything to work out. They failed on the implementation, which diverted from the plan, or they were based on unrealistic and overly ambitious goals.
The above statement is only intended to mention one thing. Speculation typically plays a pernicious role regarding projects. It creates groundless expectations, sometimes involuntarily, most of the times in a premeditated way. It does not allow for an adequate relationship between the expected resources and the results that will be generated. And it plants the seed for countless future problems among project stakeholders.
In the dozens of project ideas that we analyse, we always try to put on a good dose of realism. In Excel and Power Point we can fit all our ambition. In real life, this ambition needs to be contextualized, depending on time, space, and the interlocutors that lie ahead. Therefore, at the very least, it is relevant to understand what can go wrong and simulate the sensitivity of the models to external events.
Whoever asks for a credit based on a very aggressive and positive expectation, should not expect great understanding from those who ensure the funding.
Our concept of sustainable projects, as opposed to speculative projects, must also underline a logic of argumentative consistency. Some examples:
- If we have highly favourable projections, why are we going to ask banks for very long-term financing?
- If the project is hyper-profitable, why should the government or the European Union support someone who does not need their support?
- If I want to sell the idea that I need the banks, why forecast the release of money for the partners, in the face of debt?
After so many years with failed ultra-leveraged projects, why do we continue to design projects with 60 or 70% debt?
Perhaps, because I’ve seen so many projects in these 25 years, both in the Business Plan phase and in the execution phase, I’m having a hard time understanding why continuing to insist in the same mistakes.
From the way some CEOs talk about their projects, sometimes it seems that we start to mix sales with financing. They are happier about getting the financing than about getting the first customer.
The use of debt must be used with discretion, with greater certainty, with a greater safety margin. And we must understand all the consequences of a project that goes wrong. I am always impressed when someone presents themselves as an investor, but all they have is debt.
Without sustainability there will never be prosperity. At least, not for long. It will only last until the first turn on the way.
Luís Barbosa
Financial Architect
ABC Sustainable Luxury Hospitality