Program 6: New cash bank deposits for “almost bankable” project loans

There’s an old, painfully ironic joke about how banks will only lend you money if you have it already.  Here’s a way to solve this paradox: what if you could put money in the banks hands, at least for awhile (perhaps a year or so), would they then lend it back to you?  Don’t look now, but this is not a joke.  We can arrange that for you, on a non-dilutive basis — meaning the current owner(s) would not need to sell any equity in the project/company.

Program 6 was launched in early 2023 and enables you to leverage a cash deposit to secure a bank’s loan, which would also deliver more favorable terms and conditions for that loan.  To find out what’s possible, pose a “what if …” to your banker.  In the current economy, this also makes otherwise out-of-reach funding for new projects bankable, as nearly all legitimate banks expect an equity “contribution” of capital (not just the sunk costs of developing your project to this point, but new, unexpended cash) alongside their loan.  Without at least 25% or so, they will presume you are asking them to take on all the risk and either offer unreasonable “risk-adjusted” terms or just say “no” to a new loan sufficient for funding your project(s).

Compare Program 6 terms (fees plus whatever rate of interest your bank offers on their loan) with CAP funding’s new cash deposit option.  Similar terms can be obtained, but without any interest costs and thus more flexible repayment schedule, based not on the time it takes to repay the original investment but instead, as a JV partner, the actual retained earnings and net cash flows.

Bank interest rates are generally quite high these days, so that could cost quite a bit until there is sufficient cash generated to repay the principal and interest.

There is no particular advantage or preference for one bank over another with Program 6, although Credit Unions and some of the smaller, regional banks are likely to offer more competitive loan interest rates than the Tier 1 banks, but it just depends on how they see the borrower.

The important thing is to secure funding, somehow, because even smaller loans or equity investments can enable leverage to secure the rest of the required funding through one or more of In3’s other programs.

What Types of Bank Loans can be obtained?

This can apply to project loans, construction loans, project development loans, various types of bridge loans, a corporate expansion line of credit, etc.  Almost certainly the bank’s loan will either require either collateral, such as a senior lien against project assets to be built with the loan. If no such collateral is available, that makes the loan “unsecured,” so expect the bank to require loan repayment before the CD expires and is released. CDs can also be renewed for as long as necessary.

If for a greenfield project (most new project finance fits this category), the bank’s loan officer would need to first gain a favorable impression of the project and its planned uses of funds, plus perhaps other normal KYC considerations (especially if you are a new customer), to ensure that your loan proposal is at least “half way there” already. In which case, this deposit would “enhance” your bank relationship and may be enough to secure bank debt, even if all other options are out of reach.

This works by putting some cash into a Certificate of Deposit (CDs are bank products purchased for a specific period of time) in exchange for which they lend you money.  The deposit is not collateral for the bank’s loan, and shares neither risks nor rewards with the source of cash.  That sort of backing would require careful vetting and incur extra costs, such as from the guarantor, which is also available to qualified project developers via In3 CAP funding or DFY services.

The cash deposit is an In3 partner’s offer to “park” institutional funds for a year, typically, if that bank consider doing so sufficiently valuable that they will, in turn, agree to lend you money at terms and conditions you find acceptable.  Often, especially for smaller banks, such deposits improve that bank’s balance sheet position.  This can serve as a bit of mutual back-scratching, so-to-speak.  You will only find out what’s feasible by asking a banker — preferably one that already knows you to save time.

Background on Capital Markets 2024

Capital markets have changed in recent years, and will continue to evolve, with some things actually getting better (total available investment capital globally, savings interest rates, greater scrutiny and requirements for ethical banking practices), but most everything else, well, not so much “better” as tighter.

100% loan-to-cost, non-bank funding from reputable, ethical and private sources is a relatively recent phenomena, which became popular around mid-2022 (more), but is actually harder than it looks.  These private, non-bank lenders have little to gain and plenty to lose, so they tend to nit-pick anything that looks or smells to them like a risk. Traditional bank loans, by contrast, are even pickier, and more rule-based, usually expecting a substantial cash equity contribution from the borrower’s side, among many other hoops to jump through, including — partial list — 3 years historical financial statements, balance sheet assets (substantial wealth), a stellar corporate credit rating, sometimes a corporate warranty as credit enhancement (assuming said assets are meaningful to them), and more.

This program isn’t going to move mountains, and make the bankers fall all over themselves to get your business, but such a deposit could just make the difference, especially if the total deposit is relatively large and the bank is on the smaller side — such as with regional or community banks, credit unions, or similar.

About the Depositor & Structure

Our partner at the Family Office is working with a registered broker-dealer that can use his firm’s client’s funds to place deposits into any US bank, or any international bank with US correspondent banks. These would be term-deposits/certificate of deposits (CDs)/ similar low-risk structured products. 

Basically, then, for any project the bank would at least consider for their own term loan, this offer puts cash into an account that could be an inducement to approve and expedite that loan.

How are your commercial banking relationships? What are your main and secondary banks?  For this program, smaller is better.

How it works — Frequently Asked Questions

• Why would banks do this?  The deposit serves as an incentive for a bank to provide capital to the project via loan or line of credit. Again, it is NOT collateral, and cannot be used to repay any default on the loan.  It is purely a deposit of capital (in return for Certificate of Deposit) or other product. The bankers can specify what they prefer. The ONLY risk to the party putting up the capital is that the bank defaults on the Certificate of Deposit (CD) or loses their money otherwise in a bankruptcy. The same risk anyone would have when placing money into a bank account, because essentially that is all they are doing.
• How much should be deposited?
  The amount of the deposit does not need to be equal to the loan amount, although probably a good idea to start there, 1:1 or even 0.5:1.
  Minimum deposit:  Whatever minimum amount the bankers would need to provide the requested loan.  Traditional equity split — actual new cash available to fund the project — is at least 35% of the total budget for greenfield projects, 25% for expansions, retrofits and refurbishments.  But this is quasi-equity — a deposit into an unrelated CD account that is not available “free cash” for the project costs or other purposes.  You might start as low as 0.25:1 (if seeking $100m loan, offer at least $25m cash deposit for a year, or until the project is scheduled to begin operation as their senior lien would then, once operable, have irrefutable collateral — the project itself) and see how your banker responds?
  Maximum deposit:  There is no maximum value, as the funds are not at risk, and not used as collateral for a loan. The broker-dealer selects a pension fund or other institution to place the funds depending on the size, but there the max limit would be much larger than anything we would ever need. The limiting factor will be the lending bank’s loan appetite.  A 2x or 3x ratio of the deposit relative to the loan is common, but there are no rules on maximums.  Short version:  Whatever it takes.  But at some point, if the ratio is too high, the fees and “risk premium” interest rate the bank might charge, could make the whole transaction financially untenable, so negotiation with the lending bank on the amount of deposits is crucial.
• Structure and relationship to your project loan:  The deposit will be placed “in connection and conditional to” the bank agreeing to the loan or line of credit to you, their customer/account holder. This would need to be outlined in a bank letter. So there is a clear connection and condition connecting the project loan and the deposit(s). But to be clear: the deposit is NOT collateral and the deposit will NOT be made into the borrowing client’s account.
• What’s in it for the depositor?  What is the cost to you?  The depositor is to be paid a fixed percentage of the amount of capital they deposit (based on the amount of capital, not the amount of the bank’s loan). The amount is in the 5-7% range depending on the deal size.  Smaller ones would be the low end of that range, at or close to 5%.  This is of course in addition to whatever the funding bank charges — but that part has nothing to do with the depositor’s compensation.
• What protects In3’s client with paying this fee?  This deposit fee would be held initially via an escrow account (mutually-appointed escrow agent), which is necessary because the depositor is making the first move.  If a bridge loan is necessary for that fee, it would only be a matter of a few days until the bank confirms receipt of the deposit, and then the 5-7% fee would move out of the escrow account, and would be reimbursed to the bridge lender out of the bank’s loan proceeds.
• What banks make the most sense for this?
  • The cash deposit can land with any financial institution that is reputable, reasonably solvent, and open to the idea.
  • Size matters:  This cash incentive model makes the most sense for Tier 2 and 3 banks, as well as regional banks or credit unions in the US, or any international bank (if that’s who knows you) with US correspondent banks.  This is for banks or CUs looking for either a client’s demonstration of good faith and/or to increase the size of their assets (if the deposit is 1.5x, 2x or more than the proposed loan) and decrease the bank’s relative amount of loan exposure and other liabilities.  Major banks — while they still want depositors — may be less motivated because they have no problem attracting capital anyway, even without having to provide a project loan.
  • How to determine if your bank is right for this?  Ask.  Some smaller banks are likely to have established targets designed to improve their position, making new loans nearly impossible for them without corresponding new deposits.  Other banks may not care about things like passing stress tests or how their balance sheet appears to any auditing authority, but nonetheless would appreciate your demonstration of good faith to put cash in their hands during the period of their vulnerability as a lender — while you are building a new capital-intensive project that has not yet begun producing revenue let alone operational cash flows.

Commercial bank lending rates may not be sustainable for your project(s), making this more of a band-aid — bridging to a more permanent or at least long-term funding solution — with a similar premise as CAP funding’s Completion Assurance guarantee, making marginally investible projects bankable.

Let us know if you have additional questions or apply.