Project financing refers to the long-term financing of infrastructure and industrial projects gleaned from the project's cash flow instead of balance sheets of sponsors of the project for repayment, with the assets of project, rights and interests as secondary collateral. Project financing helps companies arrange for a loan centered on the cash flow generated on the completion of the project while utilizing the project’s assets, rights, and interests as collateral.
In order to have a continuous growth and expansion of the industries at a rapid rate Project Finance is one of the key focus areas in today’s world. It is a long-term financing of infrastructure and industrial project depending upon non-recourse or limited alternative of financial structure so that the project debt and equity used to finance the project are paid back from the cash flow engendered by the project. Project Financing is a secured form of lending, accepting the project’s rights, assets, and interests as collateral. It is useful in more than one way as it can help the Company to expand the manufacturing capacity, rent a workstation, upgrade its technology, handle unexpected expenses, experimentation of a new product or service, create a cash pool, etc.
Features of project financing
A structured financial scheme is very important to be formed because when a decision on project financing is to be made, a company requires an exceptional amount of knowledge and funds for this kind of scheme. The features of such Project Financing are as follows:
Sources for Obtaining Project Finance
Various Stages of Project Financing
- Identification of the Project Plan: - This stage of Project Financing starts with analyzing the strategies of the project and finding out whether the project is good enough for such a high investment or not. The lender must perform this step to realize if the project plan is based on the goals of the financial service company or not.
- Recognizing and Minimizing the Risk: - Before the Project financing venture begins the company must calculate the risks associated with the project. Before the lender decides to invest in the project, he has a complete right to estimate the availing risks associate with the project.
- Checking Project Feasibility: - Before the financial service company decides to invest in a project it must thoroughly analyze if the following project is financially and technically feasible or not.
It is the most crucial part of project financing which is further classified into following points:
- Arrangement of Finances: - To generate financial investment for the project the sponsor needs to generate equity or take a loan from any financial service company, which has similar goals that of the project.
- Loan or Equity Negotiation: - In this step both the borrower and lender negotiate and come on the same page and decide the total amount of the loan.
- Documentation and Verification: In this step both the lender and the borrower finalize the terms of the loan by mutually deciding them and documentation is prepared with keeping these terms in mind.
- Payment: When the documentation of the loan is completed, the lender gives the borrower the total amount decided and the project can start its process.
- Timely Project Monitoring: Once the project has begun its functioning the project manager needs to monitor the functioning and operations of the project carefully and regularly
- Project Closure: The steps mean the completion of the project.
- Loan Repayment: After the project is completed, the cash flows of the project commencement are monitored, and his cash flow is used to pay back the loan taken to finance the project.
Types of Sponsors in Project Financing
It is fruitful for the project to know all the types of sponsors that are associated with projects, this also helps you determine the objectives and the risk involved in the project. The types of sponsors available are broadly categorized into four types for Project Financing, they are as follows:
Project Financing is a limited and long-term financing scheme; it is used to sponsor big and high investment projects mainly. The cash flow that is generated from the completion of such projects is used to repay the loan amount that these projects take from financial service companies. In these kinds of projects, many participants are associated with handling the project and its operations and the ownership of these projects depends on the terms of the Project Financing agreement after the project is completed. This scheme also has a higher risk for the lender but in return pays them a higher premium on their investments as well.
As the Government of India continues to invest a high amount of money in the infrastructure of the country, it is predicted that the country will be under massive developments in the future for 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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