1. What is project finance and how does it work?
Project Finance involves long-term financing for industrial and infrastructure projects, as well as public services, using a limited recourse financial structure. In India, project finance caters to the funding needs of specific projects. It ensures that the project is considered secure once it is completed, and the generated revenue is utilized to repay the loan. Repayment in project financing depends on the project’s cash flow, while the project’s assets, rights, and interests serve as secondary collateral.
2. What are the characteristics of Project Finance?
Non-recourse financing is one in which borrowers and shareholders of the borrower have no personal liability in case of monetary default. So, any recourse lender will be limited primarily or entirely to the project assets. It is if the project company defaults on the debt.
Project financing requires a detailed project report. So, It is a very important document to take the proposal ahead.
Project Finance in India is generally used for the long term. So, large-scaled and several project participants were involved. This is helpful for the smooth running of the project financing process. Financial institutions don’t want to be in a position where the failure of one project or one borrower is large enough to cause their failure. Thus, having several project participants is useful.
Project financing involves large amounts of funding. It is generally used to fund major international development and infrastructure projects. Thus, it finances capital-intensive projects.
The SPV checks the proceedings of the project. It also maintains a line of sight at the assets. Asset allocation proceeds after the completion of the project. It is regarding the Special Purpose Vehicle which monitors all the processes.
The cash flow generated in Project Financing is used for the repayment of the loan.
3. What is the importance of Project Financing?
In the past few years, global interest in Project Financing as a tool for economic investment has increased. Project finance helps finance new investments. It is structuring the finance around the project’s cash flow and assets. Generally without any additional sponsor guarantees. It also alleviates investment risk and raises finance at a relatively lower cost. Thus, benefiting the sponsor and investor.
Financing projects through Project Finance enables the sponsors to retain the confidentiality of vital information. It is regarding the project which gets finance. It helps them to keep up with the competitive market through competitive advantage.
The debt may not fall on one lending institution or investment firm due to the presence of multiple entities. So the debt capacity increases due to syndication in Project Financing.
Through Project financing, the fund provider manages the free cash flow. That is left over after paying the operational and maintenance expenses and other statutory payments. The project company has a finite life. It limits the project. There are usually no conflicts of interest between investors and the management of the company.
For a detailed discussion on Project funding for Indian Enterprises click here.
4. How do you get Project Finance in India?
Step 1) Pre-Financing
In this stage, the lender primarily ensures that the project plan is aligned with the goals of the financial services company. This step includes identifying the strategic plan of the project and analyzing whether it’s reasonable or not.
The lender should check the risks involved in the project. Whether the project has resources to avoid any risks. So, risk management is essential before the lender begins the Project Financing venture.
When a lender decides to invest in a project, he should check if the project is financially and technically feasible. So, This can be done by analyzing several factors in the project.
Step 2) Financing
Financing the Project is a crucial part. The sponsor should get a loan from a financial institution. Thus, those objectives and goals are in line with that of the project.
Negotiating is an important part of Project Financing. Thus, the lender and the borrower negotiate the funding until they reach a solid agreement.
The lender and the borrower mutually decide the terms and conditions of the loan. So, once decided, the terms of the loan, then documentation takes place.
The borrower receives the funding after negotiation. Thus, The process should complete documentation too.
Step 3) Post-Financing
The project manager manages the project. So, he monitors it in a timely and organized manner.
It is necessary to keep track of the cash flow from its operations. This is because of the funds from the cash flow. So, the revenue will be used to repay the project funding.
