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Project Finance

Project Finance

Project finance is considered a long term as well as limited recourse financing solution which is available for the borrower against the assets and interests related to the project.

The repayment of project finance can be made using the cash flow which will be generated once the project will be complete. In case if the borrower fails to meet the terms of the loan, the lender has the power to take control over the project. Moreover, financial companies can earn much better margins because of the high risk involved. Thus, this type of loan is highly favoured by sponsors, companies, and lenders.

In Project Finance, multiple participants are allowed for handling the project while the ownership of the project is entitled as per the terms of the loan once the project is completed. This financial scheme offers better credit margin for lenders while shifting some high risks from the sponsors to the lenders.

Key features of project financing

  • Capital intensive financing scheme
  • Risk allocation
  • Multiple applicants applicable
  • Asset ownership is decided at the completion of the project
  • Zero or limited resource financing solution
  • Loan repayment with the project cash flow
  • Sponsor credit has no impact on project

Various stages of project financing

Each stage in project finance is made from few factors that together makes the stage complete.

1) Pre-Financing Stage

This stage involves the feasibility study and analysis that has to be done prior to actually financing. This involves:

  • Identification of the Project Plan
  • Recognising and Minimising the Risk
  • Checking Project Feasibility
2) Financing Stage

This is the most crucial part of Project finance, this stage is further sub-categorised into the following:

  • Arrangement of Finances
  • Loan or Equity Negotiation
  • Documentation and Verification
  • Payment
3) Post Financing Stage

This stage involves the tasks that has to be carried out after the project financing is made

  • Timely Project Monitoring
  • Project Closure
  • Loan Repayment

Sponsors in project finance

By participating in the project finance venture, each project sponsor has a clear objective, which may differ as per the type of sponsor. Usually, four types of sponsors are involved in such transactions:

  • Industrial sponsors – They see the initiative of project finance as upstream and downstream integrated or towards the core business
  • Public sponsors – These are the Central or local government, municipalities and municipalized companies who aim to focus on social welfare
  • Contractor/sponsors – Who develop, build, or run large plants and are thoroughly interested in participating in the initiative and provide equity and or subordinated debt for the project
  • Financial sponsors/investors – Plays the part of a project finance initiative with a clear motive of investing capital in high profit deals.

Advantages of project finance

  • Effective debt allocation
  • Achieving economic rent
  • Achieving economy of scope
  • Risk distribution and management
  • Increase in debt capacity
  • Reduced overall assets costs
  • Arbitrary placement of free cash flow
  • Reducing regulatory costs

Methods of the Project Financing

  • Cost Share Financing.
  • Debts Financing.
  • Equity Financing..