December 1, 2010
By Reg Renner
The challenge of correct timing for equipment selection is illustrated often by clients who finally call to talk about financing but already have the equipment invoice in their hands
The challenge of correct timing for equipment selection is illustrated often by clients who finally call to talk about financing but already have the equipment invoice in their hands. With this in mind, I strategically placed equipment selection sixth in this ongoing 10-part series on strengthening your bioenergy project for financing—not too soon and not too late.
It is tempting to focus on equipment too soon because it is tangible and real, and equipment salespeople are anxious to make a sale. However, I suggest you make sure you have the credit strength, feedstock type, production volume, and end market secured before selecting equipment. Then, start with an estimated equipment budget and a supplier search to narrow down your choices.
Choosing the correct equipment supplier is critical, as that company will become an important business partner. Do your homework and build your expertise by attending trade shows, and do not be afraid to ask for competitive quotes. You may discover that the second supplier charges more, but the proposal may be for a complete, installed package. Try to avoid settling on one supplier too early in the process; you will need to prove to your financing partners that you have checked out your options thoroughly.
Funders will often ask whether the equipment is proven or new technology. There is a lot of perceived risk in this new industry of biomass energy; if you can mitigate some of that risk by choosing a proven supplier and a technology with a track record, then you should seriously consider that option. Trying to fund a start-up business with a brand new technology and an equipment supplier who is building the first commercial unit is an immense challenge. It doesn’t mean that it can’t be done, but do not expect a typical commercial funder to be interested. You might need to ask yourself, “How much of the company am I willing to exchange for this brand new technology and unproven business plan?”
You can mitigate risk and improve your chances of obtaining funding by choosing proven technology for the first phase of your project. Once you have established a positive cash flow, you can then start to experiment with new technology. Currently, biomass energy projects that include scalability plans for future development are the most successful at getting financing.
The goal is to be strategic in your approach, and that will require research. For example, used equipment may appear to be a real bargain in this depressed forestry market, but is it financeable? Just because it appears to be a good deal doesn’t mean that you can get financing for it, especially if you are a start-up company. A lot depends on your credit strength, and new companies often don’t have sufficient credit strength. If you are a new company, I suggest you focus on brand new, proven equipment from a proven supplier for a much better chance of securing the required funds.
If you wish to use new technology, you will probably need an existing company with proven cash flow as a joint venture partner. For example, a client recently asked if I knew of a proven torrefaction technology that he could use for his new pellet mill. I suggested that unless he had funds available for research and development, he should launch his pellet mill using proven technology and build into his scalability plan the desired future step of torrefaction. The reality is that new technology in a new business is a dream that can turn into a nightmare.
I suggest working with a variety of equipment suppliers to start the budgeting process. Then, settle on one reputable and experienced supplier who can meet all your needs. Ask: Can they deliver on time? Can they make timely repairs if the equipment breaks down? Can they supply references from satisfied customers? Can they show you any of their completed projects? Ideally, select an equipment supplier that can help you build a business plan that can be scaled up as you grow in volume and market share.
Continuing the bobsleigh analogy from my first column in the Jan/Feb 2010 issue of Canadian Biomass, now is the time to push off and enter the race. Just make sure you’ve done your research and are ready to put your money and reputation on the line. Then hang on for the ride of a lifetime.
Reg Renner of Atticus Financial in Vancouver, BC, finances machinery ranging from biomass boilers to densification equipment. With 38 years of industry experience, he recently helped secure carbon offset credits for four greenhouse clients. E-mail: email@example.com.
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