6 Tips to get Hedge Funds to Finance your Projects – and 3 Ways to protect yourself if they don’t

[Lisa Arlt Escoto]

Hedge Funds.  Institutional Lenders.  Pension Funds.  Insurance Funds.  If they’re all looking for profitable commercial projects to fund, why is it so hard to get them to finance your project?

Here are 6 tips gleaned from 30 years experience on Wall Street influencing funds to provide debt financing for projects just like yours – and 3 ways to protect yourself and your money if they don’t.

1)  Structure the Project into smaller chunks – Yes, the hedge fund might manage $5 billion USD in assets, but would it really be a smart decision for them to invest half of their fund in one project?  Diversification isn’t just for the stock market. The sweet spot for commercial loans now seems to be $2 Million USD to $50 Million USD, and we would recommend a first draw of no more than $20 Million USD. 

• It’s a small enough amount that most funds can easily absorb the cost should something go wrong, but large enough to make the effort worthwhile.
• Smaller amounts keep due diligence fees lower.  Even if a fund will provide 100% financing for a project, they will not pay to investigate your project.  That’s going to have to come out of your pocket and is the cost of doing business.  
• Some ways to break the project into smaller chunks –
  • Purchase property in smaller parcels or in installments
  • Perform construction in phases
  • Divide the project into different objectives, then fund them one at a time

 2)  Insure the Project – Americans like to insure everything:  Our cars, our health, our lives, even our possessions.  Wouldn’t it be great if we could insure our investments, too?  (Note: this is NOT an SBLC, MTN, or Bank Guarantee.)

• The good news is, some insurance companies do provide an insurance “wrap” to protect the fund’s principal investment and part of the profits, should the project go sideways.  This makes it an easier decision for the fund to finance a project since no matter what happens, they’re not going to lose.
• The bad news is few insurance companies provide this. 
• The worse news is even fewer financial professionals have the contacts and expertise to not only arrange the insurance wrap, but to convince the insurance company a project is secure enough to qualify for insurance, especially if it the company or project is startup, if it has low equity and/or no collateral, or if it has a high LTV (loan-to-value) ratio, such as requiring 100% financing.
• As always, there are frauds and scam artists offering insurance or guarantees without being able to deliver.  Do your research and know you who are dealing with.

 3)  Make sure it’s a good project – This goes without saying.  Your project has to make sense.  And it has to make money.

4)  Present the project well – Just like you wouldn’t buy or invest in a product that looks shoddily prepared, neither will a fund.  Make sure your documents are in order, contain all the factual information the fund needs to make a decision, are compelling, and are as error-free as possible.

5)  Have the ability to follow through, and that includes having liquid funds to pay all due diligence costs – Everyone talks about making sure the hedge fund is financially able to fund a project, but few discuss the borrower’s need to have the financial ability to pay for due diligence costs, which are required by lenders, even in the case of 100% financing.  Paying for due diligence fees so third parties can objectively investigate the viability of a project are the borrower’s responsibility, and a cost of doing business. 

6)  Have a way to submit to the fund – Hedge funds and others offering alternative (i.e. non-bank) financing don't advertise for projects to finance.  They don’t need to.  They get their projects from the business consultants and commercial loan brokers they’ve done business with whom they trust to bring them a good project. Many people claim they have a connection and a history with a fund.   Very few actually do.

 Here are 3 tips to make sure the fund finances your project, or you get your due diligence fees back.

1)  No one can guarantee financing.  Not even the lender.  Due diligence has to be performed and even then, the loan commitment (guarantee to fund) won’t be provided until the last minute just in case something happens. If someone guarantees funding, at best they are lying or being too optimistic, at worst they are a scam. 

 2)  Know who you are dealing with.  Protect yourself from:

• Those claiming to be lenders who are merely brokers (at best) or scam artists (at worst)
• Those claiming to have a connection to a hedge fund.  Many do not
• Those claiming to have control over a hedge fund or lender.  Few have the ability to influence a fund.  None have the ability to “make” a fund do anything.
• Those charging fees to pay themselves, not to pay for the lender’s due diligence.  (Check out   http://www.worldwidecommercialfunding.com/blog/scam-or-legit/  for some tips on performing due diligence on lenders and brokers)

 3)  100% Refund Guarantee - You get funded, or you get your money back.

• A few brokers offer a refund for due diligence fees if you don’t get an LOI.  Once you get the LOI, their responsibility ends, even if you never get funded.
• There’s only one 100% Refund Guarantee  I know of – If your project is viable and factually represented, you get funded or you get your due diligence fees back.  (Hint – the guarantee is only offered by the writer of this blog post).

While there are no guarantees in funding (or in life), hopefully these 6 tips to structure your project, and 3 ways to protect yourself from losing your due diligence fees, will help you get the funding you need.

ABOUT US:  WorldwideCommercialFunding.com assists clients in getting up to 100% financing for their US and International Business Ventures and Commercial Real Estate transactions for $2 Million USD or more.  100% Refund guarantee is provided in writing.  Due Diligence fees must be paid by client at time of engagement and are refunded at funding.