In the quest for funding solutions, we have been witnessing, for a long time, the dichotomy between the search for a unique funding source that guarantees the totality of the necessary investment amount and the logic of excluding banking funding as a source of financing. In this context, we find those who stand up for each extreme:
- Those who think that banks are not reliable partners and that the best thing is not to contract debt.
- Those who see cheap credit as a way to easy money, consequently designing their projects in a hyper-leveraged way.
After seeing and making our own mistakes for years of mediation between projects and banks, here is what we believe:
- An optimal financing structure relies at least on half of the promotor funds, avoiding to overpass a half of funding in debt. There may be variants, if we are talking about public or European financial support, but the idea that developing a project with 80% debt can be right is only valid for speculators or for the unconscious investors. To ask for an external funding source to commit to a project in a higher level than its own promotor is not only wrong, but also lacks in credibility.
- It is not healthy to depend on a single bank. Excluding the cases in which the amount is too small, it is better to divide the amount for several banks. When it comes to obtaining funds, as well as when it comes to solving problems, not being overly dependent on a single banking partner is always the best thing to do.
- Negotiating an initial grace period is essential, but only in terms of capital. At any time, a project must be able to pay interests. As soon as possible the owner should be able to return capital.
- The repayment term asked to the banks must consider what the project, on a realistic and prudent basis, will be able to return after urgent operational investments.
The ideal solution is to approach the banks with a credible Business Plan. After contracting a loan, getting help always costs more and requires more concessions, frequently in a less favourable negotiating position.
Dealing with banks is not for “artists”. Not for curious or mediatic people. We must leave it to those has the knowledge to do it. They (the banks) are grateful. And in the end, the project promoter, will also be. And the reason is simple:
The thing is – some banks, to whom we find so many faults to point out, are also one of the last institutions in the universe that recognizes the value of a simple thing: the reputation made of seriousness and hard work. And this is from what sustainability is made of.
ABC Sustainable Luxury Hospitality