How to Structure Projects for Investment Funds
Companies that want to grow must continuously invest in infrastructure. This includes everything from new product launches to investments in information technology. The challenge for senior management is determining how to match or structure incoming funds with the right project. This is because some funding may cost more than other funding and some projects may carry more risk than other projects. This is a commonly used practice among municipalities, which issue bonds for different community projects. The riskier it is that the funds will not be repaid, the more investors are compensated for the use of their funds.
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Instructions
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Determine the different types of financing you are receiving. Some companies only have debt in the form of bonds or bank loans. Short-term loans usually have lower interest rates than long-term loans due the risk involved. Likewise, companies with a low credit rating usually have to pay more for borrowed funds. Companies also receive funds for stock or equity investors. While companies don't have to pay these funds back, there are costs associated with issuing the stock and fees that must be paid to the investment bank that handles the deal.
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Create a chart with each form of financing. Include the rate of interest or fee associated with the funding as well as the length of time you will have access to the funds.
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Identify the risk involved with each project. In general, the longer the project, the more risk involved. Additionally, the higher the likelihood that funds will not be paid back, the higher the risk involved with the project.
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Structure and match high risk-projects with high interest rates for invested funds. That is, projects that are riskier are funded by investors and creditors who are willing to pay more in exchange for the possibility of a higher return on investment.
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