Financing circular and sustainable enterprises (in construction and real estate)
Date: May 16, 2022
Modified November 14, 2023
Written by: Reinier Pijls
Reading time: +/- 2 minutes
Date: May 16, 2022
Modified November 14, 2023
Written by: Reinier Pijls
Reading time: +/- 2 minutes
Within the construction and real estate sector, more and more thought is being given to circular and sustainable business practices. Examples include building with circular materials, making a construction in such a way that it can be reused at a later date or the circular renovation of existing homes.
Nowadays, not only (construction and real estate) companies, but also many financiers, are aware of the need for a transition to a circular and sustainable economy as well as the risks involved if this does not happen. Stakeholders behind the financiers and societal opinion are also becoming more critical, although return on investment/financing and risk mitigation are still generally leading the way.
The foregoing does mean that some banks such as Volksbank, Bunq and Triodos no longer invest in certain sectors (such as the fossil industry) at all these days. If that example is followed by other banks and financiers in the future, (construction and real estate) companies should not only initiate a transaction from an altruistic point of view, but also from their own interest, namely to maintain or obtain (a view on) financing.
Circular and/or sustainable business, on the other hand, also offers an opportunity for (additional) financing that would otherwise not be available. But what opportunities in terms of financing are there exactly for a sustainable and/or circular business in the construction and real estate sector? Reinier Pijls will elaborate on that in this article.
If a (construction or real estate) company wants to grow, external financing is often needed. This can be done, for example, by issuing shares in exchange for a sum of money or by raising a money loan.
In the first case, the financier becomes part owner of the company. In the second case, the financier receives a money claim. When issuing shares, financing is through equity, when raising a money loan it is through debt.
What these forms of financing have in common is that, at the bottom of the line, capital is provided (in the form of equity or debt) and the company as a whole is financed. These forms of financing are therefore called capital financing .
There are various parties who, with a good business model, are willing to invest in exchange for shares. For example, you can think of private investors, business angels and/or (other) venture capitalists. Some of these financiers boast that they invest in companies with a "green" character, even though the risk is (perhaps) higher.
An advantage of such financiers is that - in addition to money - they generally provide knowledge, expertise and a network. Especially for circular start-ups and scale-ups in the construction and real estate sector, this comes in handy. These financiers can also finance via loan capital. Nevertheless, practice shows that they want shares in order to benefit from a possible value development of the company as well as to gain some control (via voting rights).
In principle, a bank does not have to do this, which means that the bank is still the most common party in the Netherlands for debt financing. The disadvantage for circular and sustainable start-ups and scale-ups is that they do not have a track record which makes banks less willing to provide financing. Furthermore, start-ups and scale-ups cannot offer collateral to the bank to ensure repayment of the financing. This also regularly causes financing to fail.
However, with a good business plan, banks can also be convinced. Especially if they are banks that support sustainability and circularity. For example, some banks offer impact loans. These are interest-discounted loans to companies whose product or service has a positive social or environmental impact.
Moreover, debt capital can be raised in more ways than just bank financing. For example, it can also be obtained through crowdfunding. The advantage of this for financiers is that the risk is spread. In addition, there are various financing options from (semi)governmental bodies that circular and sustainable enterprises can call upon.
The government has several policy instruments at its disposal that (financially) support the transition to the circular economy and to which a circular and/or sustainable (construction or real estate) company can appeal.
Some examples of direct or indirect public funding include:
A business owner may also choose to finance specific assets (rather than the company as a whole as in capital financing and government financing). This is called object financing (or asset financing). The best-known forms of object financing are factoring and leasing.
Factoring is a collective name for several services that all have in common that a so-called factoring company collects the business owner 's receivables from its customers. In factoring, receivables from customers or debtors are thus financed. It may be agreed that additional services are also provided by the factoring company, such as carrying out debtor administration or taking over the bankruptcy risk.
In leasing , receivables are not financed, but (as a rule) operating assets or vehicles. A lessor gives an object in use to the lessee for a certain period of time. In return, the lessee pays the lessor a fee.
In addition to unburdening, certainty of costs and not having to put a substantial purchase price on the table immediately (which is especially relevant when it comes to large investments as is often the case in the construction and real estate sector), leasing in particular can fit well within the circular and sustainable idea. This is particularly so, for example, if the lessor always performs proper and timely maintenance and intentions of both parties are focused on longevity or reuse of an object.
For more information on circularity and object financing (especially leasing) in the construction and real estate sector, please see this article by Heleen-Wessel Krijger.
Circularity and sustainability are becoming increasingly important to construction and real estate companies precisely because this sector has a large footprint and there are numerous ways to be more sustainable and circular.
In addition to stakeholders and society, financiers and investors are placing increasingly stringent demands on construction and real estate companies in terms of sustainability. As a rule, return and risk limitation are still leading, but the best thing for all parties is of course when circular entrepreneurship goes hand in hand with this.
With regard to financing options, circular and sustainable construction and real estate companies have at their disposal - in addition to the usual financing options - several other additional financing options. Both the usual financing options and additional financing options are described in this article. Various forms of financing can also be combined. This is called stacked financing.
What best suits your business depends on numerous factors, such as the stage of the business. Either way, it pays to get advice on this or at least have the terms checked to identify the legal risks and/or to negotiate more favorable terms. Please contact Reinier Pijls. He will be happy to help you.
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