Your business organization may be about to undertake a project that requires a relatively large amount of money, such as construction, improvement or management of a road, public building or park.
Such capital projects dealing with infrastructure are typically geared toward the well-being of the public. Some can be industrial projects. A capital project will often require long-term financing based upon the projected cash revenues of the project rather than the sponsor’s balance sheet. Together with the other stakeholders, you have to determine the most suitable financing option that will ensure you complete the project schedule.
Loans are commonly used to finance capital projects. You will have to approach a bank or other lending institution that can provide loans for the undertaking. Loans are typically secured by project assets, including any revenue-producing contracts in existence at the time. The lender will be given a lien on the assets as a safeguard against default or non-compliance with loan terms by the borrower. The loan will be repaid entirely from project cash flow, not from your general assets or creditworthiness.
It is usual for the federal government to disburse funds to help state and local governments in initiating projects. These funds are usually awarded on a competitive basis and are administered by various state agencies. The Grants.gov portal is a valuable storefront for you to find and apply for grants and track progress. It is usually expected that grants are to be used during the initial stages of the capital projects. Other funding has to be sought for the operation and maintenance of the project once construction is complete.
You can get financing for a capital project from private organizations and individuals that have an interest in the project to be constructed. Your role is to provide the necessary conditions to entice direct-equity investment, so that the project sponsor gets potentially higher returns for a portion of the investment capital. Depending on the nature of the project, you may attract equity investment such that the investor’s financial return is derived largely from tax benefits and not financial equity per se.
If your capital project deals with a novel technology or business model in high-technology industries such as biotechnology, IT and software, you may be able to attract venture capital. This is private equity provided by investors to small businesses that show a likelihood of long-term growth potential. Though high risk, venture capitalists focus on the potential for above-average returns. Note, however, that venture capitalists like to take a hands-on approach with their investments and will normally get a say in decisions regarding the project.