Ever had a dinner party where half the food gets dropped on the kitchen floor just as your 10 guests walk in? That’s what has just happened to your project financing.
The impact from current bank failures and seizures is that all other banks must now hold more reserves and decrease risk on their portfolio of loans. But these bank fiascos are unfurling while the Fed and Treasury attempt to steady inflation by taking money out of the economy by raising interest rates.
This has the impact of creating attractive risk-minimal investment options. At the beginning of 2022, a six-month Treasury bond paid an interest rate of 0.22%. The same bond today pays 4.76%. This again takes money out of the economy by luring investor to safe ground.
All of this is intended to slow down the volume and speed at which money changes hands, hopefully cooling down inflation. In the long run, that will be good for us all, but what about right now?
Project funders’ cost of capital is up, and their risk is up as well.
The vast majority of small-to-medium C&I project financing is done by private capital, not banks. But investors often increase their returns by leveraging their capital, borrowing from banks to create a much larger investment fund. Since, for those corporate borrowers, the cost of capital is going up, the returns they must make from the project in turn must go up.
Also, because of all the uncertainty just described above, the economy is considered less stable, and the risk of a project turning bad is increased, making funders less interested in taking risk. If it’s not a strong project, funders are more likely to pass.
How the state of banking impacts your project
The impact from current bank failures and seizures is that all other banks must now hold more reserves and decrease risk on their portfolio of loans. But these bank fiascos unfurl as the Fed and Treasury attempt to steady inflation by taking money out of the economy.
Additionally, as the fed raises the value of government bonds, private investors place their money on long-term holdings, which again takes money out of the economy.
How this impacts you and your projects
Good News 😉
A much larger percentage of projects need credit, so being prepared means you have a competitive advantage.
Bad News ;(
It costs more to finance, and it’s harder for the borrower to qualify, so pick both your projects and your financier carefully.
For all those reasons, before spending much time on a project, make sure you have an executable financing strategy matching your client’s profile.
Philippe Hartley is founder and CEO of CleanFi.com, a commercial project financing platform that provides instant proposals from competing project funders, leveraging multiple mechanisms such as loans, C-PACE, PPA’s, capital leases and tax equity.