An overview of finance sources for projects
There are a wide variety of funding sources available for projects or programmes although the options available depend on the nature of the company. Key sources are through loans, equity, investors, grants/funds and private finance.
Sources of short-term project finance
Overdrafts are useful sources of short-term finance due for repayment in less than a year. Interest is only charged when the facility is used and the interest payments are tax-deductible. They can be arranged at short notice and are flexible in the amount borrowed at any time.
Loans generally have higher rates of interest and are less flexible as payments need to be made for a pre-agreed amount and at a pre-agreed time. Loans can be repaid in stages or at the end of the loan period. The interest is also tax deductible and return on the loan can exceed the interest payments. The cost of borrowing money can be compared with the return from a project by calculating the Internal Rate of Return.
Sources of long–term project finance
Sale and leaseback
Assets can be sold to a financial institution and then leased back for a certain term. This releases capital in assets, which can be used for investment, but should be offset by the rental payments and loss of capital growth should the assets increase in value.
Some loans are secured by a fixed or floating charge against a company’s assets and are known as debenture loans. Debenture holders receive their interest payment before any dividend is paid to shareholders and if the business fails the holders will be preferential creditors. Parts of the funds raised for the cricket stadium at Trent Bridge in Nottingham were financed by debentures (biz/ed, 1996-2012).
These are private investors who invest directly in a company in exchange for an equity stake and perhaps a place on the board. They normally invest in the region of £10k to £100k and they invest in order to receive a capital gain, they are usually experienced entrepreneurs and can be a source of useful knowledge for the business.
Venture Capitalists usually offer 100k or more to companies that other financial institutions might consider too risky. They exchange their capital for an equity share and involvement at a strategic level often through a non-executive position on the board. Their prime aim is to increase the value of their shares so that they can sell them at a profit. The British Venture Capital Assocation (BVCA) represents most UK based private equity and Venture Capital firms. See the BVCA website
Share Capital is raised through the company shareholders. In exchange for their investment they receive a share of the profits through a dividend. They may also receive a capital gain through sale of their shares are some future date. There are two main types of shares.
Ordinary shares are held by the owners of the business who have a right to a share of the company profits through dividends, which vary in value depending on performance. As owners of the company they have voting rights at Annual and Extra-Ordinary General Meetings, however they are liable should the company become insolvent and are therefore accepting a level of risk with their investment.
Preference shares are less risky as the holders of preference shares are not owners of the company. They offer a guaranteed dividend although this may be less than that received by ordinary shareholders. As preference shareholders are not owners of the company they have limited voting rights.
Not all profits are distributed to shareholders: the company retains a proportion as reserves. This is usually the most significant source of equity finance, costs far less than external sources that charge interest and can be distributed as the company sees fit.
Shares can be issued through new issues or rights issues. New issues are generally made at the same time as the company is floated on the stock market, and the capital raised is significant. The price of the new share is based on project growth rates, stability, market sentiment, and comparison with other similar companies and the capital structure of the company.
A rights issue is a way of raising more capital from existing shareholders by offering them the opportunity to buy more shares. Rights issues are cheaper and a better deal for existing shareholders than new issues. The price is set lower than the current share price and shareholders can choose to buy more shares, sell their rights or let the rights expire.
Private finance initiative
The private finance initiative (PFI) was launched in 1992 with the purpose of transferring the risk of designing, building, constructing and operating public services to the private sector. Since then over 500 deals have been agreed. PFI contracts are long term and may last up to 30 years. PFI is attractive in the short term as it enables government departments to finance projects for which they don’t have the capital. However in the long term the payments can be higher than conventional borrowing methods and may lead departments to favour projects that are suitable for PFI.
Project Grants and funding
Grants are given to individuals or a business for a specific project. They don't need to be paid back, but they do need to be applied for, and the application process can be highly competitive and time consuming. Statutory funding is available from quangos like Connexions, English Heritage or the Learning and Skills Council. Government funding is provided through government schemes. Other sources include: the National Lottery, the European Union, philanthropy, trusts and foundations, direct endowments and specific fundraising initiatives.
Project Funding - References and further reading
Introduction - Sources of Finance, 1996 - 2012, Biz/ed. [online] Available at: https://www.bized.co.uk/learn/accounting/financial/sources/debentures.htm
[accessed 26 November 2014]
5. Grants, 2014, Gov.uk. [online] Available at: https://www.gov.uk/business-finance-explained/grants
[accessed 26 November 2014].
The Projects Group PLC, 2006, Change Context
- Revision 4.0.0, Sutton: The Projects Group plc.
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