The project development process consists of 3 stages – the pre-bid stage, contract negotiation stage, and the fund-raising stage. It may be a long-term infrastructure, industrial project, or public services, sourcing funds to implement and successfully run an undertaking is the indispensable part of the entire process. With Project Financing, a company can make arrangement for a loan on the basis of cash flow generated at the end of a project while using the assets, rights, and interests of the concerned project as collateral. This scheme provides financial aid off-balance sheet by not affecting the credit of the Government contracting authority or the shareholders. As 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.
In general, this structured financing technique is employed mostly by the sectors that have low technological risks and a predictable market. Thus, the method of funding a project using Project Financing is generally implemented by companies in the transportation, telecommunication, mining, and power industries. The sports and entertainment venue projects also often make use of the benefit of this financing scheme. The financial service organization also prefer Project Financing 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 is a great option. Project Financing is a long-term, zero or limited recourse financing option that is available to a borrower against the assets, rights, and interests related to the concerned project. One can repay this loan 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 posses the power to take control of the project. In addition, financial companies can earn better margins if a company avails this scheme while partially shifting the associated project risks. Thus, this kind of loan scheme is highly favoured by sponsors, companies, and lenders alike.
In order to act as an intermediate between sponsors and lenders, an intermediary has formed namely Special Purpose Vehicle (SPV). The SPV acts as the supervisor for the fund procurement and management to ensure that the project assets do not succumb to the after effects of project failure. Before a lender decides to finance a project, it is merely important that all the risks that might affect the project are identified and allocated to avoid any future complication.
This stage further consists of the following segments:
Identification of the Project Plan - This process includes identifying the strategic plan of the project and analyzing whether it’s credible or not. This step is important for the lender in order to ensure that the project plan is in line with the goals of the financial services company.
Recognizing and Minimizing the Risk - Risk management is one of the key steps which is focused on before the project financing venture begins. The lender has every right to check if the project has enough available resources to avoid any future risks before investing in the project.
Checking Project Feasibility - A lender has to check if the concerned project is financially and technically feasible by analyzing all the associated factors before he decides to invest in a project.
It is the most crucial part of Project Financing, this step is further sub-categorized into the following:
The arrangement of Finances - The sponsor needs to acquire equity or loan from a financial services organization in order to take care of the finances related to the project. Here the goal of the financial organization is aligned with that of the project.
Loan or Equity Negotiation – At the time of this step, the borrower and lender negotiate the loan amount and come to a like-minded decision regarding the same.
Documentation and Verification - In this step, the terms an condition of the loan are mutually decided and documented keeping the policies of the project in mind.
Payment - The borrower receives the funds as agreed previously to carry out the operations of the project as soon as the loan documentation is done.
Timely Project Monitoring – Once the project commences, it is the duty of the project manager to monitor the project at regular intervals.
Project Closure - This step indicates the end of the project.
Loan Repayment - After the project has ended, it is crucial to keep track of the cash flow from its operations as these funds will be, then utilized for the repayment of the loan taken to finance the project.
What are the costs involved to produce project documentation?
The cost of developing project documentation varies depending on the scale, nature, and complexity of the project. It is a significant expense but is necessary to secure financing and likely improves the profitability of the project.
What is Special Purpose Vehicle (SPV)
During the ongoing process of Project Financing, a Special Purpose Vehicle (SPV) is appointed to make sure that the project financials are managed properly to avoid non-performance of assets due to project failure.
What are the 3 stages of project financing?
What is off-balance-sheet?
In general project, debt is held in a sufficient minority not consolidated on the balance sheet of the respective shareholders. This helps to reduce the project’s impact on the cost of the shareholders existing debt and debt capacity. Hence, the shareholders are free to use their debt capacity for other investments.