If you are planning to start an industrial, infrastructure, or public services project and need funds for exactly the same, Project Financing might be the answer that you will be looking for.
The repayment with this loan can be achieved using the cash flow generated once the project is complete as opposed to the balance sheets of the sponsors. In the event the borrower fails to adhere to the terms of the loan, the lender is eligible for 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 key role of the SPV is to supervise the fund procurement and management to ensure the project assets do not succumb to the aftereffects of project failure. Before a lender decides to finance a project, it can also be important that the risks that may affect the project are identified and allocated to prevent any future complication. What Is Special Purpose Vehicle and Why Is It Necessary?
During Project Financing , a Special Purpose Vehicle (SPV) is appointed to make sure that the project financials are managed properly in order to avoid non-performance of assets due to project failure. Because this entity is made 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.
Key Options that come with Project Financing
Since a project deals with huge amount funds, it's important that you find out about this structured financial scheme. Below mentioned are the main element features of Project Financing :
Capital Intensive Financing Scheme: Project Financing is fantastic for ventures requiring huge number of equity and debt, and is usually implemented in developing countries since it contributes to economic growth of the country. Being more expensive than corporate loans, this financing scheme drives costs higher while reducing liquidity. Additionally, the projects under this plan of action commonly carry Emerging Market Risk and Political Risk. To insure the project against these risks, the project also has to pay for expensive premiums.