Financing a Project
Project Financing discipline includes understanding the rationale for project financing, how to prepare the financial plan, assess the risks, design the financing mix, and raise the funds. In addition, one must understand the cogent analyses of why some project financing plans have succeeded while others have failed. A knowledge-base is required regarding the design of contractual arrangements to support project financing; issues for the host government legislative provisions, public/private infrastructure partnerships, public/private financing structures; credit requirements of lenders, and how to determine the project's borrowing capacity; how to prepare cash flow projections and use them to measure expected rates of return; tax and accounting considerations; and analytical techniques to validate the project's feasibility.
Project finance is finance for a particular project, which is repaid from the cash-flow of that project. Project finance is different from traditional forms of finance because the financier principally looks to the assets and revenue of the project in order to secure and service the loan. In contrast to an ordinary borrowing situation, in a project financing the financier usually has little or no recourse to the non-project assets of the borrower or the sponsors of the project. In this situation, the credit risk associated with the borrower is not as important as in an ordinary loan transaction; what is most important is the identification, analysis, allocation and management of every risk associated with the project.
In a no recourse or limited recourse project financing, the risks for a financier are great. Since the loan can only be repaid when the project is operational, if a major part of the project fails, the financiers are likely to lose a substantial amount of money. The assets that remain are usually highly specialised and possibly some time in a remote location. If saleable, they may have little value outside the project. Therefore, it is not surprising that financiers, and their advisers, go to substantial efforts to ensure that the risks associated with the project are reduced or eliminated as far as possible. It is also not surprising that because of the risks involved, the cost of such finance is generally higher and it is more time consuming for such finance to be provided.
Risk minimisation process
Financiers are concerned with minimising the dangers of any events which could have a negative impact on the financial performance of the project, in particular, events which could result in:
(1) the project not being completed on time, on budget, or at all;
(2) the project not operating at its full capacity;
(3) the project failing to generate sufficient revenue to service the debt; or
(4) the project prematurely coming to an end.
The minimisation of such risks involves a three step process. The first step requires the identification and analysis of all the risks that may bear upon the project. The second step is the allocation of those risks among the parties. The last step involves the creation of mechanisms to manage the risks.
If a risk to the financiers cannot be minimised, the financiers will need to build it into the interest rate margin for the loan.
STEP 1 - Risk identification and analysis
The project sponsors will usually prepare a feasibility study, a business plan and a market research. The financiers will carefully review the study and may engage independent expert consultants to supplement it. The matters of particular focus will be whether the costs of the project have been properly assessed and whether the cash-flow streams from the project are properly calculated. Some risks are analysed using financial models to determine the project's cash-flow and hence the ability of the project to meet repayment schedules. Different scenarios will be examined by adjusting economic variables such as inflation, interest rates, exchange rates and prices for the inputs and output of the project. Various classes of risk that may be identified in a project financing will be discussed below.
STEP 2 - Risk allocation
Once the risks are identified and analysed, they are allocated by the parties through negotiation of the contractual framework. Ideally a risk should be allocated to the party who is the most appropriate to bear it (i.e. who is in the best position to manage, control and insure against it) and who has the financial capacity to bear it. It has been observed that financiers attempt to allocate uncontrollable risks widely and to ensure that each party has an interest in fixing such risks. Generally, commercial risks are sought to be allocated to the private sector and political risks to the state sector.
STEP 3 - Risk management
Risks must be also managed in order to minimise the possibility of the risk event occurring and to minimise its consequences if it does occur. Financiers need to ensure that the greater the risks that they bear, the more informed they are and the greater their control over the project. Since they take security over the entire project and must be prepared to step in and take it over if the borrower defaults. This requires the financiers to be involved in and monitor the project closely. Such risk management is facilitated by imposing reporting obligations on the borrower and controls over project accounts. Such measures may lead to tension between the flexibility desired by borrower and risk management mechanisms required by the financier.
Types of risks
Of course, every project is different and it is not possible to compile an exhaustive list of risks or to rank them in order of priority. What is a major risk for one project may be quite minor for another. In a vacuum, one can just discuss the risks that are common to most projects and possible avenues for minimising them. However, it is helpful to categorise the risks according to the phases of the project within which they may arise:
(1) the design and construction phase;
(2) the operation phase; or
(3) either phase.
It is useful to divide the project in this way when looking at risks because the nature and the allocation of risks usually change between the concept and the operation phase.
Retrun on Investmnet
The topic of return on investment (ROI) analyses inspires fear and loathing on the part of project professionals. Management requires them before funding projects or purchases, but few people are sure how to do them, or know where to get the "right" numbers. Many benefits are difficult to quantify in dollars, and it is often tough to meet the payback hurdles set by company policy. Besides, who really trusts an ROI analysis anyway? If the analysis comes from an outside party, it always seems to justify the product or service they are trying to sell, and if it is internally created, it just matches its author’s foregone conclusion. Many people have a way of making projects they don’t want to do fail any payback test, while personal favorites seem to generate enormous productivity returns. No wonder no one really believes ROI analyses.
But beneath these difficulties lies an extremely valuable management tool. And if properly produced, ROI actually accomplishes its intended purpose — directing a company’s investment dollars to the places they will do the most good. Creating a useful and believable ROI analysis starts with an open mind and requires accurate numbers and reasonable assumptions. The goal is to use the ROI as a major input in the investment decision-making process, not as an after-the-fact justification for an already made (or desired) decision.
While they take effort to perform, ROI analyses are not as difficult and frustrating to produce as they first seem. I recently spent a number of weeks training several hundred people at a large telecom company on how to do ROI analyses. We used a case study approach that required participants to develop their own set of costs, benefits and performance assumptions to generate proposals backed by ROI analyses. The class’s biggest challenge was to translate theoretical ROI concepts into the real world where numbers are not handed out on silver platters and the details don’t lend themselves to simple, cookie-cutter templates. Observing their efforts was enlightening on multiple levels and it pointed out misconceptions, areas of difficulty and common pitfalls.
This article takes advantage of these observations to offer five pragmatic rules for creating believable ROI analyses in the real world. But before exploring how to do an ROI properly, it is important to learn how not to do an ROI.
How Not to Do ROI
Part of the reason ROI analyses have a bad reputation is the prevalence of low value ROI templates. These templates commonly appear in the white papers handed out by vendors to support their product and service pitches. Even when not used directly by buyers, these assumptions and calculations often find their way into internally generated analyses. The most attractive feature of these analyses is that they are easy to do. However, they have little practical value and their believability quotient is very low. Why? First, the source of the analysis has an obvious bias about the outcome (buy the product!).
Next, the analysis focuses on reaching break even, not on the level of benefit my company should really get from the solution. How much productivity should I really expect? If it is only five minutes, why bother? What can I do with those five minutes? Will my employees take the time to make telephone calls or play one more round of solitaire or can they use the time to make and sell more widgets and thereby increase my revenues and profitability (the real benefit I care about)? The final issue is the credibility of the numbers. How were the estimates done? Are the costs real and complete? Can I explain and defend them and their supporting calculations to my boss? Do they reflect my company’s assumptions and experience? Do I really believe we will get that productivity? If the vendor backs up its assertions with "industry studies," how do I know that those numbers are valid and will apply to my situation?
Few of us would want to defend this type of ROI in front of our CFO or the company’s board of directors. While superficially interesting, it actually conveys very little information other than giving us an inkling that the solution may pay back provided we have some belief in the productivity assumptions. It doesn’t really explain costs and it certainly doesn’t cover benefits.
Five Rules for Creating Believable ROIs
The objective of most ROI analyses is to apply actual numbers to back up the "gut feeling" that a particular project or investment will really pay off. Most often companies conduct ROI analyses reactively for solutions that have already been selected. However, the best way to really drive high payback results for your company is to reverse the order and start evaluating ROI as part of opportunity identification well before solution selection. Seeking issues and opportunities that have the potential to generate significant value for your company if addressed, targets solution evaluation efforts to where they will do the most good and makes justification easy when the right solution is found. Understanding the value of the opportunity up front sets the parameters for what the company is willing to spend on the solution and prioritizes it against other opportunities
Of course, even when using a proactive approach to ROI, reactive situations will still arise. When analyzing the ROI of an already selected solution, honesty is critical. Remember, just like the stock market, all investment opportunities are not the same and some projects are not worth doing. An ROI must truthfully include all relevant costs and consider only benefits that are likely to be attained. Resist the temptation to drop costs or doctor benefits to make a proposed solution viable. Some projects/investment opportunities do, and should, fail ROI tests if you perform those tests honestly.
With these fundamentals in place, we can address how to create ROI analyses that are both useful and believable. The following five rules will help you reduce unnecessary effort and avoid the most common errors and pitfalls that sink typical ROIs.
Rule 1: You get only what you put in
ROI analyses run the gamut from simple vendor provided "fill in the blanks" forms to highly complex linked spreadsheets with hundreds of calculations. Determining how much detail is required depends on the audience for the ROI, the size of the investment and the complexity of the solution. However, in all cases, avoid the temptation to cut corners or oversimplify especially in the early stages of set up. Time saved is quickly lost (along with your credibility) when your numbers and calculations are challenged and you are forced to strengthen your analysis later. The general guidance is to ensure that your ROI model is sufficiently detailed to handle likely questions on how costs were captured and benefits were calculated. Obviously, this level of detail is quite different for a $10,000 hardware purchase than a multi-billion dollar ten-year outsourcing agreement.
Likewise, an ROI analysis is only as accurate as the data used to create it. Suspect numbers lead to suspect results. Focus foremost on identifying and accurately calculating business benefits (rule 2 expands on this topic). These benefits are the real value of the solution and their accuracy is a major driver of believability. When capturing costs, try to anticipate every possible cost in both the implementation and operation of the solution as well as possible side-effects — for example, short-term productivity loss while workers transition to the new solution. Include too many costs rather than too few to maximize believability. If actual costs prove less than your estimates, the final return on investment only gets better. If the extra costs sink the project, the solution was probably marginal anyway.
Use real numbers rather than estimates or assumptions wherever possible. For example, if available, use your company’s historical software defect rate rather than industry average defect rates as the basis for computing the value of a proposed testing solution. Industry studies, quotes, and numbers from analysts can be used judiciously, provided that the source is credible, the numbers are believable and they directly address the project at hand.
When assumptions are needed to create the ROI, their source makes a big difference to their credibility. Do not make assumptions on someone else’s behalf! Get the individuals responsible for meeting the number to provide it. If someone will be held accountable for training 100 sales people on the use of the solution, ask that person to supply the costs for that effort. Likewise, if the new solution is expected to improve assembly line production, do not use the vendor’s "industry" estimate of 10 percent, but instead get the anticipated level of improvement from the foreperson and line workers. Gathering assumptions from the responsible individuals gains buy-in and commitments to achieve those results when the solution is implemented.
Pilot projects are another good source of real numbers and a recommended place to test the accuracy of assumptions. Determine the most valuable measurements before starting the pilot and set up the pilot to collect those numbers as a by-product. Pilot numbers are especially believable as they result from company personnel actually using the proposed solution.
Rule 2: Benefits are more than just finding cost reductions
One of the biggest complaints about performing ROI analyses is the difficulty of finding and quantifying benefits. Benefits like improved morale and enhanced customer satisfaction sound great, but are in most cases impossible to quantify in financial terms. By far the simplest benefits to quantify are cost savings and many ROIs fall into the trap of relying entirely on this category of benefits to achieve their returns. While cost savings are a perfectly valid and valuable benefit, over-reliance on them misses other larger and potentially more valuable benefits and may focus solution efforts on solving the wrong problem.
For example, imagine a company with ten sales representatives, each averaging $100,000 per year in salary, commission and support expenses for a total annual cost of $1 million. The reps bring in an average $1 million in sales to generate overall annual revenues of $10 million (Gross Business Benefit), or $9 million of cash for company operations and profits after sales expenses are subtracted (Net Business Benefit). If we find a magic sales tool that increases productivity by a little better than 10 percent, we have two choices: use the improvements to reduce costs (doing more for less) or apply the productivity towards increasing sales. If we cut back to 9 sales people, we save $100,000 per year and still receive our $10 million in revenue, improving Net Business Benefit to $9.1 million. Conversely, we can retain the 10 sales people and use the added productivity to effectively create a new "virtual" sales person. Salary costs remain flat at $1 million with this option, but we increase revenues to $11 million per year and increase our net business value to $10 million. Clearly, the second choice is the better one for the company.
Our simplistic example shows the importance of taking a big picture view of benefits rather than pursuing the easy option of cost reductions. Ultimately, all financial benefits come from either lowering costs or increasing revenues, but six broad categories to explore for finding quantifiable benefits are: increasing sales (revenues), increasing productivity (revenue, cost savings), reducing operational costs (cost savings), improving customer satisfaction (revenue, possible cost savings), improving safety (cost savings), and enhancing competitiveness (revenue). Many potential investments will contain a mixture of these benefits in varying proportions. To evaluate which benefits to rely upon for your ROI, consider the following attributes.
- Substance — Is the benefit tangible and quantifiable? For example, increasing revenue by 10 percent is a tangible benefit. In contrast, improving employee satisfaction, while likely to be beneficial in the long run, is intangible as it is hard to measure and even harder to tie to bottom-line dollars.
- Potential — How large is the benefit if fully received? In our example, the cost savings potential is $100,000 while the revenue potential is $1million.
- Certainty — How likely is the company to receive the benefit? Replacing a telephone service plan that costs $200K/year with an equivalent one at half the cost generates $100,000 of highly certain benefits. Improving sales productivity by 10 percent should increase gross revenues by 10 percent, but there are no guarantees, therefore lowering the benefits certainty.
- Beneficiary — Who gets the value of the benefit? Is it the executive sponsor? Is it the company’s customers? A benefit may look very different depending on the role of its recipient. A good ROI analysis concentrates on the benefits that are important to its sponsors for the financial analysis, but collects additional benefits to "pay off" other project constituents. For example, the sponsor in our example, the VP of sales, will want the 10 percent increase in sales. The sale people will give their support because our magic solution reduces undesirable paperwork and helps them earn more commissions. And the sales support staff buys in because it simplifies some of their administrative tasks. Ensuring that each constituent gets identifiable benefits is an important way to build support for a project. Use the most tangible benefits for the financial calculations of the ROI, but include the less tangible ones for the non-sponsor constituents.
Rule 3: Good data is important, but don’t shortchange analysis
If you have good data, much of the battle has already been won. Don’t lose it by shortchanging the analysis. A good set of analyses translates data into the concise information needed by executives to make informed investment decisions. Unfortunately, math phobia and/or lack of knowledge in statistics or the use of spreadsheets drives people to avoid important analyses or rely on overly simplistic vendor templates. There is no way to avoid math when producing ROI analyses, but using a spreadsheet tool such as Microsoft Excel eliminates most of the tedious work and handles the complexities of the calculations. If your company does not already have an ROI template (check with your finance department), there are many examples in textbooks and on the Internet that can serve as the foundation for creating a template of your own. Don’t expect to create a template that works on a simple "fill in the numbers" approach for every investment opportunity — each case is different — but much timesaving commonality applies.
All ROI analyses start with costs and benefits, which are combined and presented through a series of calculations and tables. They are typically calculated for a 3 to 5 year time period. Executives and finance professionals have their own favorite analyses, but the following list covers most needs.
· Income statement — Presents the benefits as financial income and costs as expenses with a bottom-line profit or loss. Capital expenses are depreciated.
· Cash flow statement — Similar in format to the income statement, it shows expenses as cash outflows (not depreciated) to illustrate an investment’s impact on cash on hand. It also is the basis for the next three calculations.
· Payback period — Calculates the elapsed time before the initial investment is recouped. Companies often have a threshold time period during which an investment must pay back in order to be considered.
· Net present value — Calculates the value generated by the investment in discounted dollars. It assumes a dollar today is worth more than the same dollar tomorrow and is used to compare the long-term impact of an investment.
· ROI — Calculates the rate of return on the money invested. It is used to compare the returns of the proposed project/purchase against other investment options.
Rule 4: Tell the story
A good ROI is much more than a set of analysis spreadsheets filled with numbers. While those numbers address the financial go/no go aspects of an investment decision, they are not sufficient to cover the human aspects of that decision. Unless they are brought on board and satisfied, peripheral players can sink an otherwise good ROI. The best way to "sell" a positive ROI is to build a story around the investment and its benefits. Write a justification report to introduce the investment and create a vision of the solution in operation along with the specific tangible and intangible benefits that will accrue to as many of the project’s constituents as possible. Think visually and create a presentation that shows the solution in action, and especially how its actions create specific benefits for project constituents. If the solution simplifies the sales administrator’s job, briefly show how it does so. This illustration will make its point more persuasively than the dry productivity calculation in the Benefits section of your spreadsheet. Use this approach to tie each piece of the cost/benefit analysis to a tangible aspect of the solution. Once the picture is firmly in the minds of the ROI evaluators, review the assumptions (and their sources) used during ROI calculations. Since these assumptions play a crucial role in arriving at the ROI’s recommendations, it is important to ensure that your audience is fully aligned and accepting of them. Finally, present the ROI analyses as financial proof points for the story’s recommendations. Conclude the presentation with your recommendations and proposed next steps.
When presenting an ROI to an audience, I like to link the live Excel spreadsheet into the presentation slides. If an assumption is challenged or changed, I can adjust it "on the fly" to show the audience how it impacts the calculations. If you have gathered your assumptions from the participants, they will assist you in defending them. As a first spreadsheet for displaying the financial aspects of the project, I recommend using the Cash Flow worksheet. It has the advantage of showing real cash impacts (the true amount of the investment) alongside the projected benefits. Seeing large benefits at the same time as the costs, lessens the level of objections that occur when cost is presented alone. On its own, a $100,000 investment may seem large to an executive, but if it returns $200,000/year in benefits over 5 years in a Cash Flow statement, that same investment looks more than reasonable.
Objections are part of an ROI presentation, but careful preparations will reduce their numbers and simplify the response to those that do arise. Typically, objections relate to the following areas: credibility of numbers ("who gave you the training costs?"), skepticism of benefits ("how do you arrive at a 10 percent increase in productivity?"), and completeness of analysis ("did you consider the productivity impact of taking the sales people out of the field during training?"). If you’ve cut corners during your analysis, you will pay the price here. But if you’ve followed the recommendations in this article, you will be prepared to handle any objection that comes your way.
Rule 5: Verify results
The final step in the ROI process, verifying the results, is often forgotten or skipped out of fear of its outcome. Its goal is to validate that the ROI’s cost assumptions were accurate and inclusive, and ascertain whether the expected benefits were actually achieved. Ideally, a good ROI will be based on a series of objective metrics and assumptions that can be captured and assessed as a project is implemented. For example, we could easily measure if our sales people in were able to apply their extra productivity to increase revenues by 10 percent.
Verifying the results of an ROI after the investment has been made is valuable for many reasons. First, it provides an opportunity to learn and continuously improve the ROI process. Capturing unexpected costs and benefits gathers data to fine-tune subsequent cost/benefit exercises and understanding the cause of inaccuracies provides the knowledge to avoid them in the future. Second, it can improve overall ROI by identifying and correcting problems. For example, if the anticipated benefits are falling short, was the solution implemented properly? Perhaps a simple tweak such as increasing user training could get the project back on track. Finally, it increases the credibility of your ROI approach. If your last five ROI analyses proved to be accurate upon project completion, wouldn’t your management be more likely to believe analysis No. 6? Even if the outcome of the current ROI proves to be wildly off in practice, understanding why and applying that knowledge to the next ROI analysis increases it credibility.
The pros and cons of ending lease
Special
to the Star
Bert DeSouza enjoyed driving his 2006 Subaru Legacy GT wagon until a job
change that allowed him to work at home meant his expensive Subie would languish
in the garage.
It was time to part company — a formidable challenge when you’re
leasing.
“I had 11 months left on the lease at $606 per month. Returning it early
would have required paying a penalty in the thousands,” says DeSouza.
Like a growing number of Canadians, DeSouza advertised his car and his
lease on a lease-takeover “remarketing” website and found a willing second
lessee.
To help grease the transaction, he offered the new lessee $1,250 cash and
paid the transfer fee (about $400); in return, DeSouza was released from his
contractual obligations.
“For the original lessee, it represents an alternative to the tyranny
involved with early lease termination where it sometimes feels like the dealer
and automaker want a pound of flesh,” says George Iny, president of the
Automobile Protection Association.
“Typical cost for an early lease return runs in the $2,500 to $5,000 range
— with $10,000 not unheard of for a prestige vehicle or for someone ending a
lease in the first year.”
At the same time, used-car shoppers are turning to lease-takeover services
to find late-model used cars and trucks as an alternative to scanning the
classifieds and looking online for used vehicles to buy.
“Savvy people are using the site,” says DeSouza. It’s especially useful if
you’re looking for luxury vehicles or hard-to-find specialty models, he
notes.
Mississauga-based Leasebusters.com pioneered the lease takeover concept in
1990 and dominates the market today, but there’s no shortage of competition.
Rivals include Easyrelease.ca, Leaseexperts.ca, LeaseTakeOvers.ca and
Ontarioleasing.com, among others.
All the sites function the same way: vehicles and leases are advertised to
draw present and future lessees together; all that seems to differ is the
service fee. Leasebusters charges $295, while newer firms tend to undercut that
price to build traffic.
In reality, anyone can advertise their lease in any classified listings,
such as Craigslist and Kijiji, often at no cost.
It’s no secret leasing will get you into a new automobile at a relatively
low monthly payment, since you’re essentially renting the car. A lease takeover
is attractive because the original lessee may offer a cash incentive — it’s
cheaper than paying the penalty to the dealer — that effectively reduces the
monthly payment for the takeover party.
And because the new lessee is taking over an existing contract mid-term,
there’s no down payment and the financial commitment is shorter.
“If you like to change models often or are interested in an impractical
vehicle like a Mini or convertible, this is a great way to get the bug out of
your system,” Iny suggests.
“There’s rarely any upfront fees, so if you have a job but no cash, this
can be a good way to acquire some wheels without the upfront money associated
with leasing. We have seen savings of $100 per month or more compared to leasing
the same vehicle from new.”
“Some lease takeovers can be quite attractive with either lots of
kilometres available for the remaining term, or cash incentives to take over the
remaining payments,” points out automobile broker Mark Derry.
Canadians who lamented the loss of lease programs by Chrysler and General
Motors turned to Leasebusters to find their next contract, albeit for a
late-model car or truck rather than a new one, says Leasebusters spokesperson
Tom Liebman.
“Up until a couple of years ago, the proportion of new vehicles leased in
Canada was close to 50 per cent,” says Liebman. The number has since plunged to
around 14 per cent, according to Maritz Research — a sum that suggests there are
plenty of consumers who are suffering lease-withdrawal symptoms.
Extended-term purchase financing is supposed to be the leasing alternative
— thanks to “car mortgage” terms of 84 and even 96 months (eight years!) — but
growing traffic on sites like Leasebusters is evidence there’s still lots of
interest in leasing.
“I’m getting a lot of calls about lease-takeovers, but I always tell people
to do their homework,” says Mohamed Bouchama, executive director of
CarHelpCanada.com and host of CP24’s AutoShop.
The pitfalls are numerous.
Not only do consumers have to scrutinize the used car they’re
contemplating, but they also have to dissect the contract they’re assuming. A
lease written in 2007 will have some distinct advantages and disadvantages
compared to one minted today.
“Consumers think they’re getting a great deal when they see the incentives
people are offering, but sometimes they’re not so great,” says Bouchama. “The
lease rate was 4.9 per cent a few years ago; now it’s as low as 0.9 per
cent.”
“The main factors that influence a lease payment are price, interest rate
and residual value. All three of these have been fluctuating greatly over the
past few years,” warns Derry.
“For example, residuals are 5 to 10 per cent lower on many new cars right
now versus a couple of years back. But interest rates and some prices are lower
now.”
Lower residuals (the vehicle’s market value at the end of the lease) means
lessees have a higher monthly payment to cover steeper depreciation costs — but
that’s mitigated by lower lease rates today.
Automobile leases also have a mileage limit that, once reached, introduces
an expensive surcharge, typically 10 cents per kilometre. Consumers need to know
how soon the punishing surcharge kicks in.
“I think one of the best times to look at a lease takeover is in extreme
mileage situations. If you are a high-mileage driver that drives 35,000 km or
more per year and you can find someone that may have lots of kilometres left on
their last year or two of a lease, it can be a very attractive opportunity,”
says Derry.
By definition, a lease takeover is a late-model, one-owner vehicle — but it
still warrants close inspection like any used car. In fact, more so.
“Get the car checked out and okayed by the lessor, as per an end-of-lease
inspection, to ensure you are not going to be penalized for pre-existing
damage,” advises Iny.
The original dealer can help out in this regard. DeSouza says his Subaru
dealer was extremely accommodating by doing the mechanical inspection, arranging
plates and bringing the two lessees together.
There’s good reason for all that goodwill: Subaru gains a new client
mid-lease, and the old client may be talked into a new one.
In fact, automakers and dealers have come to embrace the lease-takeover
business model; industry giant GMAC even inked a strategic alliance with
Leasebusters in 2006.
For used-car shoppers, the prospect of taking over a lease and then
financing the vehicle at term end seems like a convoluted way to acquire a set
of wheels. Our experts agree it takes a lot of number crunching to determine if
the takeover route will yield a late-model car cheaper than simply finding it on
a used-car lot or for sale privately.
“Typically, if the car/lease is less than two years old, it is often better
to just look for a used car to finance. If it has depreciated more — it’s
further into its lease and there is a decent cash incentive — then it could be
an attractive option,” says Derry.
DeSouza’s experience was so positive he’s now considering taking over the
lease of a Ford Flex to replace his family’s other Subaru.
“It’s cheaper than financing a new or used one,” he asserts.
Our experts suggest there are so many variables involved, each takeover
lease is as unique as a snowflake — which makes comparing the potential savings
a complex puzzler worthy of a Cray supercomputer.
“In the end, you are basically buying a used car with more paperwork that
you have to be careful about,” concludes Derry.
Itching to try a lease takeover?
Our experts have some advice
• Ensure the lease is close-ended, whereby the leasing
company is guaranteeing the buyback price. Otherwise, you could be required to
pay the difference between the residual price and the vehicle’s market value at
lease end.
• When you are transferring your lease to a second
lessee, make sure the leasing company absolves you of all obligations (get it in
writing). Until recently, some companies tried to keep the first lessee on the
hook for any costs should the second lessee default, but that stipulation has
largely disappeared today.
• If you’re shopping for a lease takeover, try asking
for a bigger cash incentive. About 80 per cent of listings are resolved in 60
days, but many lessees are keen to close the deal quicker out of need.
• Many luxury and specialty models are leased rather
than purchased, and they will often show up on lease exchange sites before
they’ll show up on used-car lots.
Business financing
Personal
investment
An investment of your own personal funds proves to a banker that you have a
long-term commitment to your business venture.
Love money
This is money that is loaned from family members and close friends. This type
of investment is also called “patient capital,” which is money that will be
repaid later when the business it profitable. When engaging in this type of
investment, the business owner should be aware of the following:
- Family and friends rarely have
significant capital funds
- Family and friends may request a
stake of equity in the business
- Any form of business relationship
between family and friends should NOT be taken lightly!
Venture Capital
Although it is a popular choice among
entrepreneurs, this is not necessarily the appropriate choice for all. Entrepreneurs
should be aware that venture capitalists are looking for technology-driven
businesses and companies with high-growth potential in sectors such as
information technology, communications, and biotechnology. Also be aware that venture capitalists
WILL take an equity position in the company to help it carry out a promising
but higher risk project. This involves giving up some ownership or equity in the business to an
external party. Venture capitalists also expect a healthy return on their
investment, often generated when the business starts selling shares to the
public. Be sure to look for investors who bring relevant experience and
knowledge to your business.
Angels
“Angels” are generally wealthy individuals or retired company executives who invest
directly in small firms owned by others. They are often leaders in their own
field who not only contribute their experience and network of contacts but also
their technical and/or management knowledge. In Canada, angels have financed
approximately twice as many firms as have institutional venture capitalists.
Angels tend to finance the early stages of the business with investments in the
order of $25,000 to $100,000. In turn for risking their money, “Angels” reserve
the right to supervise the company's management practices. In concrete terms,
this often involves a seat on the board of directors and an assurance of
transparency. “Angels” tend to keep a low profile. To meet them, you have to
contact specialized associations or search Web sites on angels.
Business Incubators
Business incubators (focus on the high-tech
sector by providing support for new businesses in various stages of development.
However, there are also local economic development incubators, which are
focused on areas such as job creation, revitalization and hosting and sharing
services. Commonly, incubators will invite future businesses and other
fledgling companies to share their premises, as well as their administrative,
logistical, and technical resources. Generally, the incubation phase can last
up to two years. Once the product is ready, the business usually leaves the
incubator's premises to enter its industrial production phase and is on its
own. Businesses that receive this kind of support often operate within
state-of-the-art sectors such as biotechnology, information technology,
multimedia, or industrial technology. Businesses that were supported by an
incubator have a better success rate over 5 years.
Grants &
Subsidies
It is not always easy to bring innovations
to light so government agencies provide aid to companies. You may have access
to this funding to help cover expenses, such as research and development,
marketing, salaries, equipment and productivity improvement. A grant is a sum of money conditionally given
to your business that you don't have to repay. However, you're bound legally to
use it under the terms of the grant, or otherwise you may be asked to repay it.
As well, once you are granted money from one government source, it is not
uncommon to receive further funding from the source if you meet program
requirements.
Bank loans
Bank loans are the most commonly used source
of funding for small and medium sized businesses. Consider the fact that all
banks offer different advantages, whether it's personalized service or
customized repayment. It's a good idea to shop around and find the bank that
meets your specific needs, such as offering value-added consulting services. In
general, you should know bankers are looking for companies with a sound track
record and that have
excellent credit. A good idea is not enough; it has to be backed up with a
solid business plan.
Funding
Tips
Business funding is an extremely difficult
task as there may be strong competition and the criteria for awards are often
stringent. Generally, most funding applications require the business owner to
match the funds allotted.
Generally, a business owner needs to
provide:
A detailed project description (including:
location, key personnel, capital requirements)
An explanation of the benefits of the project
A detailed
work
plan outlining all associated costs and expenses
Personal resumes of relevant experience and
background on key personnel
Excellent personal credit / Solid BECON
score
Industry experience
Board of Directors / Board of Advisors
Personal equity/investment
Clear exit strategy / contingency plan
Tested business model with multiple revenue
streams
Most
funding reviewers will assess the proposal based on the following criteria:
Significance
Approach
Innovation
Assessment of expertise
Need
and purpose for the grant
The
identified problem areas where candidates fail include:
The research for the given business venture
is not relevant or out of date
Ineligible geographic location
Failure to communicate how ideas will be
addressed
No clear direction in the proposal
No clear focus for research moving forward
There is an unrealistic amount of work
Funds are not matched by the business owner
