Banks Need to Rethink Construction Financing ApproachTue, 11/01/2016 - 15:16
The construction industry has a perception problem. Banks seem to think they are all the same. For specialized businesses like Kepler, it is a trickle-down effect that goes beyond misunderstanding.
“There are several challenges when it comes to finding finance because construction companies are not considered the ideal client to fund,” says Alberto Garcia, Director of Finance and Administration at Kepler. “Finance depends greatly on the type of development that is being built and as many banks do not have staff with construction knowledge, those companies are not getting proper follow-up.” That can quickly become an issue for an operator like Kepler. “Although these businesses are open to installing the designs we present, our clients often say they are unable to pay.”
Kepler participates in the development, contracting, supervision and execution of heavy industrial and urban construction. It also has a niche in energy generation, specializing in the installation of turbines, mills and other motion-generated devices such as steam and gas.
Financial institutions and banks often lump specialized construction players into general categories such as highway and housing projects, neglecting that there are major differences. “Construction projects need tailored financial support that is not found in the financial categories banks offer,” Garcia says. “The bank should grant financing according to the project’s contracts and documents because developments are complex and unforeseen details that inflate the original budget are common.”
A company may realize during construction that the site needs a different type of mill, for example. This changes the estimated budget and creates financial obstacles. “Companies need financers who can wait to receive payments until the project is completed, instead of constantly requiring payment throughout the process,” Garcia says. It gives businesses a window to recuperate the borrowed capital.
With tough economic times in the sector and a low-price market, Kepler has adapted by offering flexible payment terms and conditions for its services. Clients appreciate alternatives that allow them to expand projects they would otherwise have to delay due to a lack of capital, Garcia says. The company mitigates risk by using its experience to foresee common issues that can affect the financial side of a project.
Garcia acknowledges that some projects entail greater risk than others when it comes to flexible financing. “On the one hand, low-risk projects such as highways or housing can quickly repay capital,” he says. “On the other hand, sectors like mining have higher risks from the inherent dangers of its industry.”
Although the Energy Reform opened possibilities in its energy generation niche, Kepler is not in any hurry to join the bidding process for PPPs, which require an amount of capital and commitment the company is not yet prepared to offer. “We have to carefully analyze the market dynamics to decide which companies to collaborate with,” says Garcia. “Kepler is not entering any bidding rounds but we envision transitioning into self-financing through short-term five to six-year projects to auto-generate work.”