WHAT IS PROJECT FINANCING.
Project finance refers to the funding of long-term projects, such as public infrastructure or services, industrial projects, and others through a specific financial structure. Finances can consist of a mix of debt and equity. The cash flows from the project enable servicing of the debt and repayment of debt and equity.
What Is Project Finance?
Project finance is the funding (financing) of long-term infrastructure, industrial projects, and public services using a non-recourse or limited recourse financial structure. The debt and equity used to finance the project are paid back from the cash flow generated by the project.
Project financing is a loan structure that relies primarily on the project’s cash flow for repayment, with the project’s assets, rights, and interests held as secondary collateral. Project finance is especially attractive to the private sector because companies can fund major projects off-balance sheet (OBS).
* Project finance involves the public funding of infrastructure and other long-term, capital-intensive projects.
* This often utilizes a non-recourse or limited recourse financial structure.
* A debtor with a non-recourse loan cannot be pursued for any additional payment beyond the seizure of the asset.
* Project debt is typically held in a sufficient minority subsidiary not consolidated on the balance sheet of the respective shareholders (i.e., it is an off-balance sheet item).
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.
Understanding Project Finance.
The structure of project financing relies on future cash flows for repayment of the project finances. The assets or rights held under the project act as collateral for the finance. Governments or companies prefer project finance for long gestation projects or for joint venture arrangements or collaboration arrangements.
The project finance structure for a build, operate, and transfer (BOT) project includes multiple key elements.
Project finance for BOT projects generally includes a special purpose vehicle (SPV). The company’s sole activity is carrying out the project by subcontracting most aspects through construction and operations contracts. Because there is no revenue stream during the construction phase of new-build projects, debt service only occurs during the operations phase.
Project financing is for projects which carry high risks on the capital employed. There is no revenue for the companies participating until the commencement of operations. During the construction phase, there may be one or two offtake agreements, but no revenue streams. There is no recourse available to the parties funding the projects.
The project generally remains off the balance sheet for the financing parties and the government. Companies typically hold the project debt in a subsidiary with a minority holding. This helps in maintaining the debt ratios of the company. For the government, they may wish to keep the project off their balance sheet to have more fiscal room.
IMPORTANT : Not all infrastructure investments are funded with project finance. Many companies issue traditional debt or equity in order to undertake such projects.
Financing the project is to guarantee that the amount of money needed is available. This means that the project management sponsor, in order to know how much money is needed, needs to be able to calculate the amount of the cost, benefits and investment.
Off-Balance Sheet Projects financing.
Off-balance sheet financing is an accounting practice where companies keep certain assets and liabilities from being reported on balance sheets. This practice helps companies keep debt-to-equity and leverage ratios low, resulting in cheaper borrowing and the prevention of covenants from being breached.
Non-Recourse Project Financing.
What Is Non-Recourse Finance? Non-recourse finance is a type of commercial lending that entitles the lender to repayment only from the profits of the project the loan is funding and not from any other assets of the borrower. Such loans are generally secured by collateral.
Advantages of Project Financing.
In the appropriate circumstances, project finance has two important advantages over traditional corporate finance:
1. increase the availability of finance.
2 reduce the overall risk for major project participants, bringing it down to an acceptable level.
Disadvantages of Project Financing.
The major disadvantages of project finance are:
1. Complexity of the process due to the increase in the number of parties and the transaction cost.
2. Expensive as the project development and diligence process is a costly affair.
3. Litigious with regard to negotiations.
4. Complexity due to lengthy documentation.
Why choose Project Financing.
Project finance helps finance new investment by structuring the financing around the project’s own operating cash flow and assets, without additional sponsor guarantees. Thus the technique is able to alleviate investment risk and raise finance at a relatively low cost, to the benefit of sponsor and investor alike.
Project Financing – Sources of Finance for Projects.
There are a wide variety of funding sources available for projects or programmes although the options available depend on the nature of the company. Key sources are through loans, equity, investors, grants/funds and private finance.
Sources of short-term project finance.
The main sources of short-term financing are:
1. trade credit.
2. commercial bank loans.
3. commercial paper, a specific type of promissory note.
4. secured loans.
Sources of long–term project finance.
The main sources of long- term project finances for companies are:
1. Capital market.
2. Special financial institution.
4. Non-banking financial companies.
5 Retained earnings.
6. Foreign investment.
7. External borrowings.
Ways to Fund a Project.
Project funding options are: grants, partnerships, borrowing money, investors, donations, crowd funding, growing revenue and conserving cash, and selling up.
What Are the Various Stages of Project Financing?
The process of development of a project consists of 3 stages: pre-bid stage. contract negotiation stage. fund-raising stage.
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.
REQUEST FINANCING FOR YOUR PROJECT THROUGH BECTIC FINANCE COMPANY LIMITED.
We will be pleased to assist you no matter what your funding requirements are. If you have been turned down by banks or financial institutions, we can help. As project financiers, we pride ourselves in using creative ways to provide the funding you require during these difficult economic times.
Bectic Finance Company Limited is a Worldwide Project Investment Group with a Private Fund and we have our own private investor capital, we have the resources to fund projects globally. The minimum lending requirement is 1 Million USD|EURO to 10 Billion USD|EURO. We have the capability to fund upwards of 10 Billion USD|EURO by using our syndicated partners. Bectic Finance Company Limited is able to offer low interest rates and if necessary a grace free period of repayment until a project has adequate cash flow. This is achieved by using our unique 100% Project Funding program, which is consists of 60% private lending and 40% private equity in the project.
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