Commercial projects are costly. For developers seeking to embark on commercial projects, getting the right financing sources is critical. There are many financing options available such as equity financing, mortgage and commercial loans.
With these and many other options, the developer needs to weigh properly. Getting it wrong at this point may lead to stalled projects and eventual bankruptcy. This section provides some critical issues that a developer must keep in mind in striking the right financing options for commercial projects.
The Tenure of the Facility
Due to the huge amounts involved in commercial projects, the financing option should have a longer tenure to give room for planning, actual construction and subsequent income generation. The tenure can range from five years to fifteen years depending on the financier and level of risk.
Interest on financing facilities takes a substantial portion of repayment. To ease the burden, look for financiers offering lower interest rates in the market. Due to the enormity of the project, seek a negotiated interest deal with the financiers. Compare the offers and make a good decision.
Due to unforeseen occurrences, commercial projects may face several hurdles such as a shift in government policy, labour disputes or natural calamities. When finding the right financing option, consider the flexibility of the facility.
Rigid financing options may affect the completion of the project leaving the developer with the unbearable burden of a stalled project and debt repayments. Flexible options afford developers some legroom to negotiate whenever unforeseen circumstances crop up.
Commercial projects face a myriad of risks such as government policy risk, market risk and demand risk. These risks pose potential threats to the success of the project. In financing, it is advisable to map out the various risks at inception and allocate the risk appropriately to the parties.
The golden rule of risk allocation is to apportion the risk to the party that is most suitable to handle it.