Good Faith Account Purpose & Benefit
There are a number of benefits to the Good Faith Account (GFA) financing model however, these benefits are not economically driven per se for each venture. In other words, the GFA does not lower debt service, serve as security or collateral to the lender, or encumber the GFA investor. Instead, the GFA’s major benefits include:
- Overcoming “Un-Financeable” Project Barriers:
Debt lending is rarely achievable unless the venture has a time-proven commercial track record. Equity investment thus becomes the norm, however, these equity investors typically leverage their position to squeeze ownership and control from the project developers. Equity investment also often times requires long-term off-take agreements, which has an unintended consequence – the business tends to lose the off-take incentives as a result of the long-term off-take agreements resulting in dramatic impacts on cash flow and debt service capabilities. In contrast, the GFA funding model gives the borrowing business access to 100% debt financing at better-than-market terms while maintaining decision-making control to maximize both incentives and profits.
- Deal Vetting Process Efficiency: The GFA acts as a qualifier for an otherwise insatiable market of borrowers looking for better-than-market terms. The extensive due diligence to fund the GFA process serves as an input to streamline the due diligence of the borrower, which begins once the GFA is funded. Thus, the GFA serves as a throttle to allow the lender to review and fund only the most deserving projects and to do this process more efficiently. The end result: more projects get successfully funded
- Lowers Potential Loan Default Risk: The funding of the GFA, in and of itself, establishes a strategic partnership between the owner of the GFA funds, the borrower, and the lender. As a reminder, the GFA does not serve as collateral to the lender; however, once the GFA’s administrative hold is released after the GFA obligation is met, these funds could be leveraged to assist if additional debt service funding should be required. The strategic GFA relationship serves as the foundation for future collaboration.
Synthetic GFA Provides Additional Purpose & Benefit to the Lender
The Impact Investing profile as well as job-creation, profitability and efficiency of a template is a model that can be scalable. This is what qualifies the business proposition for a synthetic GFA. The default mode for a GFA is one in which the GFA is funded by a third party who is a key project stakeholder: an organic GFA. In most cases, the lender is also a profit sharing participant with the borrower. To assure that the borrowing venture is successful, the lender is usually in agreement to move forward with the 100% financing loan. This is triggered when the GFA requirement has been met by an outside investor or stakeholder. This represents a unique opportunity for investors looking for a fixed return for 3 years with no risk to principal. The additional upside of Impact investing assures a profitable project - good for society and the environment while meeting our lenders requirement for job-creation.