05 December, 2022
What is Project Finance?
Essentially, Project Finance refers to funding long-term projects related to public infrastructure, services, industry, etc. These undertakings are funded through a specific project finance model. The model can consist of a mix of debt and equity-based instruments. Plus, the project's cash flow enables the servicing of the debt and repayment of equity and debt. Furthermore, the project finance model comprises the BOT (build, operate, transfer) model.
Project Financing relies upon future cash flows for repayments instead of the sponsors' balance sheets. The assets or rights retained under the project are used as collateral for the term loan. Both the Government of India and companies may resort toproject loansfor projects that have long gestation periods or for joint-venture arrangements.
It contains various vital elements, wherein the loan amount is arranged through a Special Purpose Vehicle (SPV). Thus, if you own a company, you may carry out the project yourself or subcontract a portion. If there are no revenues during the construction phase, the interest on debt capital is paid after the operation commences.
What are the key features of project financing?
The salient features of project financing are listed below:
Capital Intensive Financing Scheme:It is best suited for ventures that require large amounts of equity and debt. It is also applied in developing countries for development purposes. However, it is more expensive than corporate finance and increases costs while reducing liquidity.
Risk allocation: Risks associated with the project are shifted onto the lender. Thus, sponsors prefer this scheme as it helps them mitigate risks. However, lenders do receive a better credit margin with project finance.
Multiple participants: Since project financing deals with large-scale projects, numerous parties can be allocated to handle various aspects.
See AlsoMode of Financing - BPMBAsset ownership: An SPV is relied upon to oversee the project and monitor the assets. After the project is complete, the project's ownership is given to the concerned entity as decided by the terms of the loan.
Limited recourse solution: With project financing, the borrowers do not have ownership of the project till completion. Thus, the lenders do not have to waste time evaluating the assets of the borrower. Instead, they can focus on the feasibility of the project. Thus, the financial company can opt for limited recourse from the sponsors if it deems that the project might not generate sufficient cash flow to repay the loan.
Loan repayment with cash flow: As per the terms of the loan, the excess cash flow should be used to pay off the outstanding debt received by the borrower. Over time, this reduces the risk exposure of the financial services company.
Improved tax treatment: Under the scheme offered, the project and/or sponsors can avail of better tax treatment.
Credit impact: Project finance ensures that the credit of the sponsor has no impact on the project. Thus, the credit risk of the project is better than the credit standing of the sponsor.
Now that you know more about Project Finance, you can avail of the same to meet capital requirements for your projects. This is especially useful if your own a Micro, Small, or Medium Enterprise (MSME). The Government of India and other financial institutions offerMSME Project Loanto help smaller businesses scale up and meet their capital requirements to fulfil undertakings. With suchproject loans for new businesses, your enterprise can thrive while contributing to the nation's development.
HDFC Bank recognises the challenges entrepreneurs face while acquiring capital. Thus, HDFC Bank has created MyBusiness, a one-stop solution that gives you easy access to loans, digital solutions and provides you with the essential knowledge you need to run your business. With HDFC Bank MyBusiness, you can scale up, expand your operations, and nurture your business.
To learn more about the various products and services at HDFC Bank that can benefit your enterprise, you can check out the MyBusiness page.
*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circ*mstances. HDFC Bank recognises the challenges entrepreneurs face while acquiring capital. Thus, HDFC Bank has created MyBusiness, a one-stop solution that gives you easy access to loans, digital solutions and provides you with the essential knowledge you need to run your business. With HDFC Bank MyBusiness, you can scale up, expand your operations, and nurture your business.
