How to… ride out the credit crunch

In the second in its series on how cleantech companies are coping with recent financial turmoil, BusinessGreen.com asks those holding the purse strings what green firms can do to insulate themselves from the worst effects of the credit crunch

Opinions may be firmly divided on how badly cleantech firms will be affected by the recent credit crunch. There is little doubt that in the short term, at least, it will become harder to secure project financing.

So, which cleantech firms are likely to find it hardest to secure credit and investment given the current financial climate and how should they go about ensuring they are well positioned to weather the credit squeeze?

Financial experts are agreed that sadly, the extent to which your firm will be affected is already largely determined by the nature of your business.

Farley Thomas, global head of wholesale at HSBC, is not alone in his view that private cleantech companies could find it particularly difficult to raise financing, with those start ups taking the biggest gambles the most likely to encounter problems. "The more innovative the areas, generally, the harder it is to get funding," he warns.

Simon Webber, manager of the Schroders Global Climate Change Fund, agrees that as investors and lenders seek to minimise their exposure to risk, technologies in early stages of development and public companies still making losses could be badly affected.

And while there is never a good time to report setbacks in your product development, firms are likely to find investors increasingly willing to ditch a bet that doesn’t seem to be working out. "If the timescale for products becoming commercially viable is lengthened, it may be harder for businesses to get funding in already tight credit conditions," warns Webber.

Established operators to reap benefits

But Webber is convinced that there is a silver lining to all these warnings of tightening investment and credit conditions. Green investors pulling money out of high risk start ups still have to put their money somewhere, he notes, meaning some listed companies already established in more mature technology areas such as wind and solar could somewhat perversely find it easier to attract project financing.

While the nature of your business will prove the dominant factor in determining the scale of the credit problems you will face, there are still steps executives can take to minimise the risks they face.

"Cleantech companies ought to be thinking about how to link their business plans to stable sources of demand, for example, by avoiding exposure to consumer spending or being overly concentrated in one small market," advises Ian Simm, chief executive of green investment company Impax.

He adds that the focus on managing cashflow should be more intense than ever, particularly for high growth firms who run the greatest risk of short term cashflow issues that, given current tight credit conditions, could prove extremely costly.

Look for long term deals

Meanwhile, Matthew Clayton, investment manager at Triodos Bank, advocates a focus on pulling in longer term customer deals, noting that while a repeatable revenue stream and blue chip customers are always attractive to backers they are particularly valuable when investors are feeling risk averse. "For renewables and cleantech projects in particular longer term agreements on the sales side are very attractive," he says.

For start ups and firms seeking venture backing, it is a case of applying the same principles that govern every pitch for fresh investment – only more so.

"You need a good business plan, products or services with a clear addressable market and a strong management team to make it happen," says Mark Shorrock, chief executive of investment firm Low Carbon Accelerator, adding that the closer you are to generating revenue, the better.

Build investor relationships early

Simm also advocates building relationships with investors as early as possible. "Your business should establish good relationships with banks and potential funders well in advance of your need for funds," he says, adding that you also need to have a clear, credible plan for how you'll use the money raised and to have thought carefully about the aims and restrictions of your potential providers of capital.

Encouragingly, experts are agreed that in the long run there is not too much for the cleantech sector to worry about. Despite the collapse of Northern Rock and Bear Stearns and the persistent warnings of an economic downturn, the fundamental consumer and legislative factors driving interest in green issues remain and as such cleantech firms that boast good technologies and management teams should face few problems raising finance.