Lauton U: The Hidden Costs Of Project Funding – Part I

In our last post, titled The Shocking And Controversial Truth About Project Funding – What You Need To Know Before You Approach Investors we discussed how you need to be prepared to bear certain costs before you receive a single dollar from investors. Now let us take a closer look at what these costs entail. We came up with a list of over 20 expenses. While this list is not by any means all inclusive, it will serve to give you a good idea of what to expect. We have divided these it into two categories:

• Costs that you will incur while preparing your project package and• Due diligence costs from funding sources

Of course, determining which of these applies to your project depends on its size and scope. It is also based on the type of funding you seek, whether it’s debt , equity or a mix of both. Because funding sources only accept certain reports from their own sources, you may find that some items overlap within these categories.

Today’s post deals will cover the costs you will incur when a funding source is ready to perform their due diligence on your project and all of the key individuals involved. A word of caution. You should not underestimate what information funding entities can uncover about you, your project and your associates. Failure to provide full disclosure will disqualify the disingenuous and will result in the forfeiture of all monies paid to them. It is not unusual for prospects to spend anywhere from $15,000 - $120,000 in due diligence expenses so make sure your project package is absolutely flawless before you put it in the hands of a funding source. Once you start the process, there’s no going back.

Costs Associated With the Due Diligence ProcessThe costs and the level of due diligence will depend on how big your project is, what percentage of the project the funding source is expected to finance and the extent of your experience with similar projects. These costs can vary greatly from one source to the next.

1. Appraisal reportso An appraisal report is a written estimate of the value of your property, based on the findings of an appraiser who is a Member of the Appraisal Institute (MAI). The appraisal fee for estimating market value of your property can be a fixed fee or a percentage of the estimated value. Typically, the larger the property the higher the cost. Specialized types of properties such as mines can incur additional costs.

2. Legal feeso Beyond the legal costs you need to bear to have all your investor package documents in order, you will be responsible for the legal expenses involved with the drawing up of contracts, the creation and maintenance of escrow accounts and those related to the closing.

3. SWOT Reporto You may or may not have a SWOT report on the strengths, weaknesses, opportunities and threats of your project to include in the funding package. Regardless, funding sources usually have their experts perform their own evaluation at your expense.

4. Other third party reports
o These include environmental, engineering and other specialized reports which may be required as part of the investors or lenders due diligence on your project. Exactly what these are and how much they cost depend on the type of report and the industry as well as the scale of the project. Make sure you budget for these costs if your think they might be needed for your project.
In addition to due diligence related costs, you may have to bear other basic expenses.

Application fees
Many funding sources have an application fee on all submissions. They utilize this as a way to cover their time and expenses working on your project even if they’re forced to reject it in the end. It also serves as a way to ensure that only the most serious, well prepared and committed parties submit funding applications.
We hope that you are now better prepared to face what’s ahead.

More on costs next week…

In our next post, we will address the various costs with the preparation of a project package. These will make-up the bulk of your expenses.

Tell us about your experience

In the meanwhile, we would like to hear from you about your experiences in your quest to secure funding for your project. In addition to sharing your unique perspective with fellow readers and subscribers, you will also be helping us gain more insight into what’s most important to you. Whether you are a startup or an established business seeking funding for an expansion or a new project, we would like to hear from you about your concerns and successes.