The vicious cycle in getting money to fund your big idea

NAIROBI: I was working on an Excel sheet when a dialogue box appeared on my screen saying I had made a “circular reference.” Google informed me that a circular reference is a series of references where the last object references the first, culminating in a closed loop. They indicate complex dependencies that are difficult to understand or resolve.

Sometimes funding capital projects is like that: in order to undertake a project, you need to get funding; in order to get funding, investors need to see the project running and generating actual results — it is a vicious cycle.

If ever one was going to carry out a capital project in Kenya, the time is now. Why? Kenya aims to achieve middle-income status by 2030.

A PwC outlook publication on capital projects in sub-Saharan Africa asserts that improving Kenya’s infrastructure to the level of middle-income countries could “boost annual growth by more than three percentage points”. Thus, the Government and private sector are losing sleep trying to achieve double-digit growth.

Assume that you have all factors of production, you only lack the money to fund your idea. This brings us back to the loop.

Say you wanted to build a factory and have researched what is required to realise this dream. You are no manufacturing expert, but an astute entrepreneur taking a risk to fill a gap. You calculate your approximate spend and how soon you could break even, so all that is left is finding someone to lend you some millions to make things happen.

You assume banks will be dying to fund your idea so you strut in, proposal in hand, only for them to reject your request because they want proof of concept before they can fund you.

Certainly some entrepreneurs concur with the hyperbole that the bank is ‘a place that will lend you money if you can prove you don’t need it’. Then again, capital budgeting decisions are tough for financiers. Whether creditors or equity owners, either party will tell you squarely that ‘it is nothing personal, just business’, and everyone knows that business aims to make profit.

MEAGRE CAPITAL

To fulfil the bank’s pre-conditions, you start your project with meagre capital. You contract as many people as are willing on credit, promising payment at a future date. By the time you approach the bank again, the time value of money has spiked your cost of goods. The bank likes your project but still needs to conduct due diligence to decide whether to fund you or not.

For good measure, and considering your difficulty getting a loan, you do not revise your loan request upwards to reflect current circumstances lest the bank take you back to square one. Once you have the initial funding, you intend to right the wrongs and assume the bank will augment its funding.

Meanwhile, delayed payments increase your contractor fees; you need to re-spend your sunk costs since your material was not durable; you did not hire an appropriate project consultant so the project is mismanaged (more waste); and so on. When you get the loan, you revise your request and the process comes full circle, ready to recommence.

Backtrack to where the loop began and assess your options: what are your chances of success? Should you hire a project manager or wing it and hope the results will be different? Save enough money to finance the whole thing? Forget about the project? Rob a bank? (I’m joking) Whatever the case, you can do this the hard way, or the easy way. Next week, we explore the options.

-The writer is a strategy and operations consultant at PwC Advisory.