Module five: Session Two
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Training objective
 To review the various financing options available to
road contractors
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Training outcome
• By the end of the session trainees should be
able to:
 Identify requirements needed for road
construction
firms to access bank services
 Explain the procedures for accessing bank credit
 Interpret bank terms and conditions before accessing
credit
 Appreciate banks and other financial institutions as
sources of business capital for road construction.
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Common finance needs for
contractors
 Equipment finance
 Vehicles, heavy construction equipment
 Specialised equipment
 Working capital finance
 Materials, Labour and Overheads before certification
and payment
 Guarantees and bonds
 Bidding
 Performance
 Retention
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Sources of financing for contractors
 Supplier credit for working capital items, equipment
hire and equipment purchase most common.
 Short term and not suitable for financing fixed assets
purchase.
 Finance institutions including banks, finance houses
and insurance companies
 Contracting agency (Govt) financing
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Guiding principles to support
contractor finance:
 The contracting agency could:
 Pre-finance
a job or equipment
 Stand guarantee to suppliers or lenders
 Set up a leasing scheme
 Have a pool of equipment
 The decision to opt for any of these
mechanisms should be based on the
following three principles.
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Guiding principles for contractor
support:
 Market rates-This means the contractors
should be charged full market rates
 Reimbursement capacity- the investment
by the contractor should be justifiable from
the income expected
 Simplicity – the scheme should be easy to
set up and manage
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Options available for long term
financing
 Lease financing schemes
 Pre-payment of equipment by the project
 Equipment pools
 Bridge financing
 Guarantees on work, on payments or on credit
 Term Loans
 Conditional sales contract
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Lease financing
 Leasing is a contractual arrangement that
allows one party to use an asset owned by
another in exchange for specified periodic
payments.
 Types of lease financing:
Finance lease
Hire-purchase
Operating lease
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Pre-payment of equipment or
works
 The employer/agency pays the contractor an
advance or pays the supplier of equipment.
 The advance or financing is recovered from the
work payments in suitable installments.
 Administration of the scheme may be entrusted
to a financial institution.
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Equipment pools
 Ownership of the equipment is retained by a
government agency that sets up an equipment pool.
 Disadvantages of the option:
 The equipment is usually not properly maintained
 The rental rates are often too low to cover the costs
of maintenance.
 Such rates do not prepare contractors to compete in
real market situations.
 Contracting agency itself may be blamed for delays
in the execution of work
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Bridge financing and guarantees
Bridge financing:
 In bridge financing loans for short terms are
given out, using future income as guarantee.
 Contractors of public work can use the
construction contract as guarantee to obtain
bridge financing.
 The supplier of the funds may require assurance
that payments will be channeled through it.
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Challenges of financing small
contractors
• Commercial banks in developing countries are
reluctant to lend to small contractors usually
operating in rural areas for a set of reasons:
 The contractors are often first-time borrowers without
any track records or credit reference;
 They are unable to fulfill the collateral requirements of
the bank;
 They can not present their previous years’ financial
statements and their financial management skills
wanting;
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Challenges of financing small
contractors continued..
 They are unable to finance 20-50 % of the investment
as usually required by the banks
 Costs of monitoring are high
 If equipment is involved, its safety and maintenance is
difficult
 Securing government commitment to payment is
difficult and where obtained payment is irregular
 A track record of good work performance is lacking
 Continuity of works is not certain
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Guaranteeing work
 The contracting agency could agree to make
payments to the contractors through the bank,
 The bank could withhold parts of the payments in
case of bad loan repayment.
 The risk is that when payments are withheld,
contractors are not able meet operating
obligations such as wages.
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Guaranteeing loans
• Another way is to guarantee contractors’ loans to finance
their equipment by setting up a guarantee fund to issue
to contractors letters of guarantee.
• It is an option in countries where efforts to set up a
leasing scheme or to facilitate finance through other
types of guarantees have not succeeded.
 The programme agrees to share the loan risk with
banks.
 The fund could also cover bid, performance and
retention bonds.
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Working capital financing
 Trade credit
 Accounts receivable financing or factoring
 Purchase order financing
 Bank stand by credit - overdraft
 Business Improvement Loan(BIL)
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Group discussions
1
2
3
4
5
Describe the common finance needs of road contractors
and the various ways they may obtain finance.
Explain how lease financing operates and why it may be
suitable for road contractors
State the key components one would expect to find in a
typical finance application assessment system.
Explain why it may be difficult for banks to provide
working capital finance in road construction.
Identify the key challenges in raising road construction
finance and suggest how they can be addressed.
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Q&A
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