The process of development of a project consists of 3 stages - pre-bid stage, contract negotiation stage, and fund-raising stage. Be it a long-term infrastructure, public services, or industrial project, sourcing funds to implement and successfully run an undertaking is an integral part of the entire process. With Project Financing, a company can arrange for a loan based on the cash flow generated at the end of a project while using the assets, rights, and interests of the concerned project as collateral. As this scheme provides financial aid off balance sheet, the credit of the Government contracting authority or the shareholders is not affected. Since Project Financing shifts part of the risk associated with the project to the lenders, this financial plan is one of the most preferred options for private sector companies.
This structured financing technique is implemented mostly by the sectors that have low technological risks and a predictable market. Therefore, the method of funding a project using Project Financing is generally employed by companies in the telecommunication, mining, transportation, and power industries. Sports and entertainment venue projects also often avail the benefit of this financing scheme. Project Financing is also preferred by many financial services organisations because they can earn better margins if a business chooses to opt this scheme as opposed to any other financing technique.
If you are planning to start an industrial, infrastructure, or public services project and need funds for the same, Project Financing might be the answer that you are looking for. Project Financing is a long-term, zero or limited recourse financing solution that is available to a borrower against the rights, assets, and interests related to the concerned project. The repayment of this loan can be done using the cash flow generated once the project is complete instead of the balance sheets of the sponsors. In case the borrower fails to comply with the terms of the loan, the lender is entitled to take control of the project. Additionally, financial companies can earn better margins if a company avails this scheme while partially shifting the associated project risks. Therefore, this type loan scheme is highly favoured by sponsors, companies, and lenders alike.
In order to bridge the gap between sponsors and lenders, an intermediary is formed namely Special Purpose Vehicle (SPV). The main role of the SPV is to supervise the fund procurement and management to ensure that the project assets do not succumb to the aftereffects of project failure. Before a lender decides to finance a project, it is also important that all the risks that might affect the project are identified and allocated to avoid any future complication.
During Project Financing, a Special Purpose Vehicle (SPV) is appointed to ensure that the project financials are managed properly to avoid non-performance of assets due to project failure. Since this entity is established especially for the project, the only asset it has is the project. The appointment of SPV guarantees the lenders of the sponsors’ commitment by ensuring that the project is financially stable.
Since a project deals with huge amount funds, it is important that you learn about this structured financial scheme. Below mentioned are the key features of Project Financing:
This stage further consists of the following segments:
Being the most crucial part of Project Financing, this step is further sub-categorised into the following:
In order to determine the objective of the project and the risks related to it, it is important to know the type of sponsor associated with the project. Broadly categorised, there are four types of project sponsors involved in a Project Financing venture:
Project Financing is a long-term, non-recourse or limited recourse financing scheme that is used to fund massive projects which can be repaid using the project cash flow obtained after the completion of the project. This scheme offers financial aid off balance sheet, therefore, the credit of the shareholder and Government contracting authority does not get affected. In Project Financing, multiple participants are allowed to handle the project while the ownership of the project is entitled according to the terms of the loan only after the project is completed. This financial scheme offers better credit margin to lenders while shifting some of the risk from the sponsors to the lenders.
As the Indian Government continues to investment on the infrastructure of the country, it is expected that there will be massive developments in future in terms of power, transportation, bridges, dams etc. Most of these projects will be using the Public Private Partnership (PPP) method indicating a rise in Project Financing during the upcoming years. This entire cycle will further help improve the economic condition of India.
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