Introduction

Imagine you’re a builder with a grand vision for building something that can change the skyline of a city and town. You have your plans, your team, and your ambition on board, but it’s when you need to raise funds that things get complex. Navigating the Indian maze of project finance can prove daunting. Endless paperwork and high-interest loans seem to form a thick, gloomy blanket over the bright, potential future of one’s project. But you don’t have to go through that maze alone. Over the course of this blog, we walk you through some of the most common hurdles builders face and how to overcome these; making the path toward project funding a little clearer.

Understanding Project Finance for Builders

Project finance is a financing technique where the lender mainly focuses on the potential revenue and risks of the project rather than the creditworthiness of the borrower. The approach will be very suitable for capital-intensive projects, such as development of real estate, infrastructure, and renewable energy. Builders are dependent on project finance for construction funding, land purchase, and other significant expenses.

For Indian builders, the challenge is not only about raising the necessary amount of finance but also risk managing financial issues in the entire life cycle of the project.

Key Project Finance Challenges Confronting Builders

1. Lengthy and Complex Approval Process

Securing project funding in India is not an easy proposition and requires multiple stakeholders, including banks, NBFCs, and even government agencies. Builders generally face delays to get their project sanctions due to red tape, a long list of paperwork, and stringent regulations.

• Builders have to file lengthy paper trails comprising any documentary evidence regarding the ownership of land, project feasibility reports, and environmental clearances, thereby making the sanctioning approval process lengthy.
• Complexity levels have risen due to high interest rates, absence of lending and RERA and environmental department’s compliance checks.

2. Tight Lending Policies with High-Interest Rates

Lending in India is highly competitive and has been dominated by high interest rates through most of the builders’ contributions. High-interest rates particularly for the smaller and mid-sized builders who have no financial history or adequate collateral to bargain for improved loan conditions.

• Today most of the project funding source NBFCs are mostly costlier than the traditional banks.
• Fluctuation in market condition and soaring inflation rates with ever-changing government policies do raise the interest rates further. All these factors carry it on the builders’ head.

3. Restricted Access to Alternative Funding Options

Traditional sources of project financing are loans from banks and funding from NBFC. Alternative sources available to builders in India are:

Public-Private Partnerships (PPP): The agreement between the government and private builders is complicated as the policies of the government tend to change in the middle of a project.

– External Commercial Borrowings (ECBs): ECBs may be cheaper in terms of interest payable; however, their lenders strictly impose conditions on Indian builders.

– Equity Financing: The concept of equity financing is challenging for a builder with no track record because many investors do not want to take risks or bet on companies that are still considered green.

4. Cash Flow Problems and Delayed Payment

Sometimes, the disbursement does not even work out that well even after a successful approval. The builders would then be subjected to administrative or conditions from the lender’s disbursement conditions and therefore delayed in their receipts. Such an eventuality will trigger the following:

• Breaking or interference with the construction schedule, causing project delays

• Increased costs because of inflation and increased cost of materials over time

Strain on the builders’ cash flow; builders would struggle to pay their contractors and suppliers promptly.

5. Strengthened Risk Appraisals

Banks and financial institutions take a heavy-duty approach towards risk appraisal for project finance approvals. The builder has to prove that his proposed project is commercially viable, which more often than not, involves comprehensive project reports, market analysis, and cash flow forecasting.

• Probability of Non-Completion: Banks assess whether the developers have a history of successful project completion in terms of time and cost control with no disputes from the contractors. Developers that are delayed or fight with the contractor cannot get financing easily.
• Market risk: This comprises risks emanating from factors like demand and prices’ trends in the market. A saturated property market or a poor market makes it hard to justify the revenue for a project on its expected prospects for builders.
• Political and Regulatory Risk: The profit and feasibility of a project, perhaps from a financial basis, can be significantly affected by changes in zoning laws, building codes, or environmental regulations, which adds to the challenges of securing finance.

Solutions for Overcoming Challenge

1. Adopt Collaborative Approach

Builders can collaborate with financial institutions, law experts, and governments to streamline the process of approval and reduce further delays. There is also the possibility of obtaining experienced help from the loan agencies which would facilitate navigation through the complex webs of regulatory environments more effectively.

– Loan Agencies provide an intermediary in loan application procedures, giving all the required documentation that sets the whole process into motion.

– Regular communication with lenders and regulators can help early on in the identification of potential issues and possible solutions before things turn out to be significant delays.

2. Diversifying Funding Sources

Builders should look for alternative funding sources to get away from dependence on traditional bank loans. These may include:

– Private Equity Investors: Investors can be brought in to raise the capital, and simultaneously, reduce debt. Investors can be attracted to projects with strong growth perspectives.

– Crowdfunding: Builders are utilizing crowdfunding as a method for raising capital for small to mid-sized projects. Though it is still evolving in India, it is an innovative source of funds.

 3. Improvement in Financial Transparency

Clear and transparent financial records will help builders build even more trust with lenders. These include:

– The Development Cash Flow Update: Regular reports on progress made to lenders will keep the cash flowing and avoid delays in disbursal.

– Correct Cash Flow Projections: Projected cash flows will correlate with actual project costs and timelines, helping builders negotiate more favorable financing terms.

4. Risk Management Practice Strengthening

By embracing proactive risk management, construction companies engaged in building construction are likely to attract project finance. This encompasses the following:

• The demonstration of financial viability through feasibility studies and market analysis about the project;
• Contingency plans for the probable delay of the project, cost overrun, and changes in regulations;
• Contact with professional financial consultants and loan agencies to facilitate de-risking and compliance with lender requirements.

 

Role of Loan Agencies in Project Finance

Loan agencies play a very important role when it comes to builders crossing the hurdles of project financing in India. These agencies act as intermediaries between builders and lenders and, therefore have to ensure that all the regulatory requirements are satisfied for a large amount of these occasions, rendering most favorable loan terms to its clients.

Loan agencies offer some of the following services to their clients:

Project Funding Consultation: Advising builders on the best funding options based on the client’s specific needs and project size.

Loan Structuring: Provide developers with loan structuring to allow for minimum interest rates, but high repayment

Documentation Support: Provide developers with support in preparing the relevant documents to aid in faster approvals

Conclusion

Financing of projects in India has great challenges for builders, varying from raising money for the project to taking care of risk during the lifecycle of the project. But when taken up cooperatively, with diversified sources of funding, and working closely with loan agencies, this overcome-the-obstacle is made to achieve successful completion of a project.

At Nihal Fintech, we understand the complexities of project finance and ensure builders navigate the financial maze with confidence. We help you fund your projects; advice and guidance are given on how to access them; and with loan applications, you’re well covered, as we do it all for you.

Reach out to us today and learn how we can help you secure funding for your next big project.