8 Jun 2022, 13:45 — 7 min read
In my previous article I explained what is project funding and the criteria to get it. Here I am addressing some frequently asked questions regarding prooject funding.
Project Finance is the financing of long-term, industrial projects, infrastructure projects, or public services using a limited recourse financial structure. Project financing addresses the funding requirements for the exclusive project. We can say that in Project funding, the project itself is collateral. When the project is completed, the revenue generated by it will be used to repay the loan. Project financing relies on the project’s cash flow for repayment, with the project’s assets, rights, and interests held as secondary collateral.
Non-recourse financing means that the borrowers and shareholders of the borrower have no personal liability in case of monetary default. Any recourse the lender may have will be limited primarily or entirely to the project assets if the project company defaults on the debt.
Project financing requires a detailed project report. This is the most important document to take the proposal ahead.
As Project Financing is generally used for the long term, big scaled projects, several project participants are involved. This is helpful for the smooth running of the project financing process. Financial institutions don’t want to be in a position where the failure of one project or one borrower is large enough to cause their failure. Thus, having several project participants is useful.
Project financing involves large amounts of funding because it is generally used to fund major international development and infrastructure projects. Thus, project financing finances capital-intensive projects.
The SPV (Special Purpose Vehicle) checks the proceedings of the project and also maintains a line of sight at the assets. After the completion of the project, asset allocation is processed with regard to the Special Purpose Vehicle which monitors all the processes.
In Project Financing, the cash flow that the project generates after completion is used to repay the loan.
In the past few years, global interest in Project Financing as a tool for economic investment has increased. Project finance helps finance new investment by structuring the financing around the project’s cash flow and assets, without any additional sponsor guarantees. Project Financing thus alleviates investment risk and raises finance at a relatively lower cost while benefiting the sponsor and investor.
Financing projects through Project Finance enables the sponsors to retain the confidentiality of vital information regarding the project which is going to be financed and helps them to keep up with the competitive market through competitive advantage.
The debt may not fall on one lending institution or investment firm due to the presence of multiple entities. So the debt capacity increases due to syndication in Project Financing.
Through Project financing, the providers of funds manage the free cash flow that is left over after paying the operational and maintenance expenses and other statutory payments. The project company has a finite life and is limited to the project there are usually no conflicts of interest between investors and the management of the company.
In this stage, the lender primarily ensures that the project plan is aligned with the goals of the financial services company. This step includes identifying the strategic plan of the project and analysing whether it’s reasonable or not.
The lender should check the risks involved in the project and if the project has the resources to avoid any risks. Risk management is essential before the lender begins the Project Financing venture.
When a lender decides to invest in a project, he should check if the project is financially and technically feasible. This can be done by analyzing several factors in the project.
Financing the Project is a crucial part. The sponsor should get a loan from a financial institution whose objectives and goals are in line with that of the project.
Negotiating is an important part of Project Financing. The lender and the borrower negotiate the funding until they reach a unanimous agreement.
The terms and conditions of the loan have to be mutually decided by the lender and the borrower. Once they decide on the terms of the loan, then the documentations take place.
The borrower receives the funding as and when the negotiations are done and the documentation is completed.
As the work for the project begins, the project has to be monitored in a timely and organized manner by the project manager.
After the project has been finished, it is necessary to keep track of the cash flow from its operations. This is because the funds from the cash flow and revenue will be used to repay the project funding.
Also read: 15 Lessons from failures: A startup’s guide to becoming investment-ready
To explore business opportunities, link with me by clicking on the 'Connect' button on my eBiz Card.
Image source: Canva
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views, official policy, or position of GlobalLinker.
Posted byVishal Terkar
Founder @ Terkar Capital
Difference between Bank Guarantee & Letter of Credit
24 May 2022, 09:33
20 Apr 2022, 10:14
Most read this week
Please login or register to join the discussion