Project financing is the most popular and focused source of funding in the present world owing to the constant development and expansion of various industries.
Project finance is the method of financing projects with a long gestation period. Project finance is the long-term funding for industrial, mining, infrastructure, oil, gas, building, and construction projects. Usually, equity and debt are used to finance the projects.
In the real estate sector, the cash flow that comes out of financing covers the operating expenses. Usually, an asset’s lifespan is calculated and the financing aligned with it. Mostly, it is made up of debt and equity.
The cash flow generated by the project enables the repayment of debt and equity.
Sources of project finance
There are various sources of project financing in India like debt, equity, and government grants. Such sources of project finance create an impact on the cost of the project, liability, cash flow, and claims to project assets and incomes.
Low-interest loan financing
Debt Financing
Equity financing
Government grants
Stages of project financing
Project identification
Identification of a good project that requires investment. It should be realistic in terms of implementation.
Feasibility of the project
Identification of technological and financial feasibility of the project
Financing of the project
Arrangement of debt/equity/loans
Negotiation
Documentation
Finance/payment
Monitoring of the project
Proper review and monitoring of the project enable to repay the amount taken in the form of loan/equity/debt.
Advantage of project financing
Non-recourse
In the non-recourse loan, the sponsor doesn’t have any obligation to make the payment if the revenue generated from the project is not sufficient enough to cover the interest and principal loan amount.
leverage
In project financing, the cost of development and construction of the project is financed by debt. Most of the development of the project is done on a highly leveraged basis.
Off-balance sheet treatment
In project financing, the sponsor is not required to report the project debt on its balance sheet. It provides an added practical benefit.
Tax benefits
The sponsor uses all the possible benefits to the permissible extent.
Disadvantages
Project financing is an extremely complex process of funding. It consumes a lot of time in negotiation and documentation. Associated legal cost in project financing is also very high in some cases. The risk assumed by the sponsor is very high in non-recourse project financing.
Project financing is the most focused area and requires knowledge concerning structuring and refinancing the projects.
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