Funding capital for recycling projects? What to do when banks say 'No'

Written by: Robert Keep | Published:

With recycling high on UK Plc's agenda and directives from Europe suggesting sector growth, Robert Keep examines funding alternatives when banks say 'No'

The European revised Waste Framework Directive (rWFD) requires that all EU Member States recycle a minimum of 70% of all waste generated by the year 2020.

It is generally agreed that the UK is on course to meet its targets, but only if the planners provide the required permissions to recycle more material through existing plants; permissions are granted to build more recycling facilities across the UK; and those new plants can be funded.

The technology now exists to recycle waste into much higher grade materials, not to mention energy, which in turn will encourage an increase in demand.

Construction waste, for example, has historically been seen as a low grade product but new generations of recycling plants are changing that perception with processing plants now able to turn waste into high value construction applications and products. The appetite for this waste processing is certainly changing as is the market wish to see more plants tackling the UK waste mountain.

The UK is faring well in comparison with other European member states, however, we could do better as certain parts of Europe have more of an appetite for this type of recycling. WRAP estimates that around 600 million tonnes of products and materials enter the UK economy each year… only 115 million tonnes of this gets recycled.

Living in a burgeoning throwaway culture and with the rapid advances in technology, between now and the end of 2020, it is estimated that around 10 million tonnes of electronic products will be purchased which will eventually be simply thrown away.

If recycled, this 10 million tonnes will include precious metals, such as gold (20 tonnes), silver (400 tonnes), platinum (7 tonnes), with an estimated market value in excess of £1.5 billion. By pursuing opportunities for re-use, the UK could reduce its reliance on raw materials by as much as 20% by 2020. So, if recycling makes such economic sense, why are we not doing more? There may be a very simple reason.

Since the economic downturn, traditional funding institutions have become more formulaic, which in turn has resulted in them becoming more risk adverse. Not that recycling is a risky business, especially when the European Parliament is expecting the UK to achieve certain targets.

Regardless of what happens on 7 May, Cameron & Co, or whoever is in power after that day, will still have the recycling mandate to adhere to and those projects will need funding; funding that the banks may not be able to provide.

The investment required for the designing, the building and the commissioning of a new recycling facility is by no means insubstantial. The sums can be large and traditional lending institutions are now risk adverse. So why could recycling projects, which are sanctioned by the EU, be difficult to fund?

While such projects will make good economic sense, funding may be and certainly is difficult to secure for certain projects, because such schemes are complicated to transact and different types of funding may be required.

Funding packages may consist of many elements. For example: capital equipment would be funded purely on an asset finance or leasing basis (the lessor will prefer this route, wanting the security of being able to reclaim the goods if the borrower defaults); the construction of the surrounding infrastructure, such as ground works, drainage, structures and supportive facilities may be funded on a pure business loan basis; the business may need operating capital, so shortfall capital would be a requirement; or invoice discounting may be a requirement to aide cash flow from debtors.

All this creates a Molotov of a funding cocktail which many institutions may not have the appetite for. In any event, those that do have the appetite to offer such a broad range of product are generally risk averse and therefore the overall package required may only be available to the very strongest and well established businesses with multiple sites and long track records. This outcome severely damages the sector as it plays to only a small segment of it, effectively barring the smaller, newer player.

By following the traditional funding route, funding managers will decide if that element of the project that comes under their professional remit is viable or not. If then one of those funding managers decides that the deal is not for them, this will dictate that the overall funding package is not viable and therefore refused. Institutional funding may also be point scored for its viability and typically refused on a technicality. This is why new lenders are coming into the space and a more holistic view of vetting projects for funding is becoming more commonplace.

Over the last few years there has also been a small but positive proliferation of equity based funding availability. While on the one hand this has provided some respite, it also involves the entrepreneur(s) relinquishing significant equity stake(s) and therefore potential future wealth. While some will see this as an inevitable price worth paying others will regard it is as unfair and may even end up stunting their business as a result of that view. The old adage of some of a big cake is better than all of no cake is easy to say when it's not your cake as they say.

Unfortunately there is no easy suggestion, no easy way out and no easy way in. If a credible proposal is made to the banking community and rejected, the option is generally taking debt from outside the banking community or taking equity from a private or institutional investor(s); or a mixture of the two.

When making the decision of which is best, the potential borrower must take full account of the relative costs of the three options: debt only; debt/equity hybrid; equity only; and the availability of any of the component parts. Equity can seem inexpensive but a dividend every year and a large option over an eventual disposal can change that dramatically. Debt can seem expensive by comparison, particularly amortising debt where monthly repayments include interest and capital, but in the longer term will be generally less so and as a corporate borrower the interest costs can be offset under current regulations against taxable profits.

Overall it is clear to all that the picture is complex. Understanding the options can demystify things but won't always lead to availability.

In short the answer to the perennial question of "What do you do when a bank says 'No'" has to be "Nothing" until you have spoken to someone that truly understands the options.

They need to have access to the full product range and the ability to help you to decide which option is best, why and more importantly which will be available in individual circumstances. Once a decision is made as to how to proceed, the credibility of the proposal and the availability of the funding in the mix and on the terms required will dictate the success or failure of the project. Given the gravity of the decisions to be made, it must be worth making them over a slightly longer time frame and getting them right.


Robert Keep is CEO of Norton Folgate, the leasing and financing specialists for the construction, recycling and sustainability sectors. For more information email RobertKeep@NortonFolgate.co.uk or visit www.nortonfolgate.co.uk


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