Funds are the lifeline for any business. No business can be started, grown and expanded without funds. There are two sources of funding for any business i. e Owner’s funds (Equity/Equity Capital) and Borrowed funds (Debt/ Loan). Since the owner’s funds are limited, borrowed funds are required to start and grow a business. If you want to setup any project or business, this article shall help you in understanding and preparing a good Project Report to take a loan from banks and financial institutions.
Borrowed funds (debt/loan) can be taken from banks, Non-Banking Financial Companies (NBFC) and other financial institutions. For getting a loan from a Bank, a Project Report is required. Banks ask for the Project Report to know about the project and to ascertain whether the project would generate sufficient cash flows in future to repay the loan amount given by the bank. Banks make necessary calculations and compute various ratios on the basis of the Project Report and market scenario to check the financial viability and feasibility of the project.
A Project Report is a comprehensive document which gives details about the project. Following heads should be covered in the project report:
- Executive summary
- Project Details
- Promoters’ details
- Market Study
- Total Project Cost and Finance Structure
- Financial projections and ratios
- Sensitivity analysis
- Risk analysis and mitigation
- Competitive analysis
- SWOT Analysis
- Proposed Term sheet
The executive summary includes short and brief details about the project which contains the basic highlights of the project such as Project location, Capacity, Implementation period, Commercial Operation Date (COD), Project Consultants, Total Project Cost, Promoters, Financing structure and ratios etc. The executive summary gives the overall view of the project so that the user gets the brief information about the Project.
Project details include name of the project, size, capacity, output, off-take arrangement (sales), machinery to be used, details about Original Equipment Manufacturer (OEM), procurement consultant, land and its status details, technical details, equipment to be used, warranties and guarantees, insurance, maintenance arrangement, time required and phases in construction, Commercial Operation Date, technical partner details, project consultant details, techniques to be used and analysis of technique.
Each and every detail about the project should be mentioned under this head to make the project report meaningful and self – explanatory.
Promoters are the sponsors of the project. The details to be mentioned under this chapter comprise of the professional background of the promoters, qualification, age and experience of the promoters, KYC of the promoters (such as PAN number, Aadhaar number etc.). Details about the promoters help banks to check the background of the promoters. Relevant experience of the promoters is a plus point. Banks also check the CIBIL report of the promoters. Generally, banks do not give loan to an individual having a low CIBIL score.
Market study and details about your product should be mentioned in the report. Product with a good and growing market means more revenue from the project. A detailed market analysis should be done in order to check the marketability and saleability of the product. Size of the market, target consumers, niche, marketing plan, budget, market trends should be covered under this head. You may buy market reports from various researchers available in the market or conduct the research work on your own.
TOTAL PROJECT COST AND FINANCE STRUCTURE
Proper estimates of the project cost should be mentioned in the report. Broad heads of the project cost should be mentioned such as cost of machinery, cost of furniture fixture, construction cost etc. Detailed breakup of the project cost is required to get a fair view of the total project cost. The estimates should be given by properly assessing the market cost and taking a quotation from various vendors. The actual cost should not exceed the estimates as it will lead to project cost overrun. The promoters will have to bring additional equity funds to meet such higher cost.
Banks do not fund the total project cost. Promoters are required to bring in some of their funds. Promoter funds are also called as margin money/equity funds/owners funds.
The ratio of owner’s funds and borrowed funds depends on the financial viability of the project and norms of the lending banks. The ratio is known as the Debt-Equity Ratio. The ratio depends on the financials of the project. Thus, after assessing the financial viability of the project, a debt-equity mix should be decided. Excessive debt may put a burden on the cash flows of the project. In such a case, promoters would not be able to repay the debt on time due to insufficiency of funds. Thus, Debt-Equity ratio should be decided properly after carefully analysing the cash flows of the project.
FINANCIAL PROJECTIONS AND RATIOS
Banks ask for financial projections of the project. Projections means estimates of the sales, expenditures, cash flows and financials of the company. Generally, 3 – 5 years of projections are prepared in order to give realistic projections. Projections for a higher period will be unrealistic. For longer tenure loans, banks may ask for projections for a longer time period. Also, projections are made as per industry scenario and life of the project such as in case of power generation projects, projections are made for 25 years.
Projections are made on the basis of certain assumptions for the future. You should have proper justification for the assumptions on which projections are made. For example growth rate of sales should be in line with the growth of industry and GDP growth, expenses should not exceed industry standards and margins should be in line with the industry in case of traditional business. In case of any deviation in assumptions from industry standards, one should have proper justification.
Ratios also play a very important role in analysing the financial viability of the Project. Ratios such as Debt service coverage ratio, Interest coverage ratio, EBITDA margins, PAT margins, IRR help in assessing the repayment capacity and returns from the project. Types of Ratios to be calculated depend on the nature of business and the type of loan required.
This analysis is done by the banks to check the impact of changes in assumptions on the financial projections of the project. Thus, including sensitivity analysis in the project report helps a bank in judging the financial capabilities of the project in case of deviations. Sensitivity Analysis can be done by making changes such as decreasing growth rate, increasing interest rate and increasing expenses etc.
RISK ANALYSIS AND MITIGATION
There are many risks associated with a project such as construction risk, promoters’ risk, political risk, financial risk and competition etc. You should identify the risks associated with your project and the ways you mitigate those risks. These risks and steps to mitigate risks should be mentioned in the project report to justify bankers that the project is risk-free and if any risk arises, appropriate measures shall be taken to mitigate those risks. Banks may increase the rate of interest in case of riskier projects.
Competitors are always there in all traditional businesses. The project report should mention the close competitors of the project and their performance. Also, mention the uniqueness of your product and how you would survive in the competition.
SWOT stands for Strength, Weakness, Opportunity and Threat. SWOT analysis helps in assessing the strengths, weaknesses, opportunities and threats related to the project. It gives an idea to the bankers about general viability and future of the project.
PROPOSED TERM SHEET
Proposed term sheet includes the terms and conditions on which you are seeking a loan. The proposed Rate of interest, tenure of the loan, collateral security offered, No. of repayments and guarantee etc are mentioned under this head. Banks are not under any obligation to sanction the loan as per the proposed terms and conditions. The proposed terms can be considered by the banks while sanctioning the loan.
All the relevant documents, report, designs, charts and quotations etc. should be annexed with the report in order to make the project report comprehensive. This will also help you in providing all the documents to the bank in one go.
This is all about the Project Report a bank requires to assess the project and sanctioning a loan. However, the bank may ask for additional Information and document to sanction a loan. Proper financial projections and estimation and full disclosure of the information is the essence of a good project report.
Modal Business plan / financial model of restaurant business can be downloaded from here.
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