The Amazing Power of an Advance Payment

The Amazing Power of an Advance Payment
(Often called  a Prepayment)

Problem:  You want to do a brownfield expansion of your mine or install some new capital equipment to expand production.  Unfortunately – your banker either doesn’t understand your request – or can’t get an approval from their credit department.  And your shareholders don’t want to dilute their equity by raising more capital.

Solution:  You negotiate a long-term offtake contract with your preferred Buyer.  The value of the goods or minerals to be delivered over the term will pay for the investment you want to make.  Then you talk to a private credit fund or an investor through your preferred consultant and negotiate a three-way Advance Payment Agreement.  You also pay some money to some lawyers to document everything.  The Funder makes payment now to you for the goods or minerals you are going to deliver in the future.

Benefits:  All parties win – the Seller uses the Advance Payment productively.  The Buyer has a locked in supply contract from a preferred Seller. The Funder makes a margin on the funding.  If well structured – this arrangement can also often be classified as a trade payable/receivable – not core debt.  Your CFO and Treasurer will like this.

Other Sectors:  Though most often used with bulk commodities such as wheat, refined energy products or metal ores, this structure has also been used to fund the construction of wind and solar farms and for commercial construction.  The Seller and the Buyer need to have a strong and trusting relationship.

Conclusion:  When well designed, an Advance Payment or Prepayment is an amazingly powerful tool to source capital and enhance liquidity quickly.

David L Thomas

13 June 2023