Project Finance and Corporate Finance are also referred to as Balance Sheet Financing. There are two financing models to fulfil the requirements of a business, both rely on debt and equity as sources of funds.

What is Corporate Finance?

 The objective of the Corporate Finance model is to ensure the optimal usage of the available capital and maximize the shareholders’ wealth. Corporate Finance is the financing model, to puts all its projects/ business segments under one roof and consolidates the cash flows. 

The Corporate Finance model actively shares the risks and rewards associated with the respective projects/segments. It particularly helps the entities having various projects with a similar risk profile. The success or failure of these projects affects the corporate balance sheet directly.

If the lenders experience a payment default, they can lay claim to company assets since they serve as collateral. The security offered to the lenders is generally common. On all the assets and cash flows of the business entity.

Similarly, a company that might need to reorganize following a bankruptcy filing could use corporate finance to gain access to capital or reorganize debt. Corporate executives also use this type of financing to add value for shareholders by improving operations and ultimately generating greater profits.

What is Project Finance?

Lenders offer project financing as a long-term, zero, or limited recourse financing solution to borrowers based on the rights, assets, and interests associated with the relevant project. As this scheme offers financial aid off the balance sheet, it does not affect the credit of the Government contracting authority or the shareholders. Since 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.

With Project Financing, a company can arrange for a loan based on the cash flow generated at the end of a project while using the assets, rights, and interests of the concerned project as collateral. Whether it’s a long-term infrastructure project, public services initiative, or industrial endeavour, securing funds for the implementation and successful operation of the undertaking is a fundamental aspect of the entire process.

The repayment of this loan can be done using the cash flow generated once the project is complete instead of the balance sheets of the sponsors. If the borrower fails to comply with the terms of the loan, the lender has the right to take control of the project.

Key Features of Project Financing

Below mentioned are the key features of Project Financing:

  • Capital Intensive Financing Scheme: Project Financing is ideal for ventures requiring a huge amount of equity and debt, and is usually implemented in developing countries as it leads to the economic growth of the country. To ensure the project is against these risks, the project also has to pay expensive premiums.
  • Risk Allocation: Risks associated with the project are shifted towards the lender. Therefore, sponsors prefer to avail this financing scheme since it helps them mitigate some of the risks. On the other hand, lenders can receive a better credit margin with Project Financing.
  • Multiple Participants Applicable: As Project Financing often concerns a large-scale project, it is possible to allocate numerous parties to the project to take care of its various aspects. 
  • Asset Ownership is Decided After Project:  Once the project is completed, the project ownership goes to the concerned entity as determined by the terms of the loan.
  • Zero or Limited Recourse Financing Solution: The financial services company can opt for limited recourse from the sponsors if it deduces that the project might not be able to generate enough cash flow to repay the loan after completion.
  • Loan Repayment With Project Cash Flow: In Project Financing, the excess cash flow received by the project should be used to pay off the outstanding debt received by the borrower. Gradually paying off the debt will reduce the risk exposure of financial services companies.
  • Better Tax Treatment: The project /or the sponsors can receive the benefit of better tax treatment. Therefore, this financing solution is the preference of sponsors to receive funds for long-term projects.
  • Sponsor Credit Has No Impact on Project: While this long-term financing plan maximizes the leverage of a project, it also ensures that the credit standings of the sponsor have no negative impact on the project
Conclusion

Investors use project financing, a long-term, non-recourse, or limited recourse financing scheme, to fund massive projects. After completing the project, we use the project cash flow for repayment. This scheme offers financial aid off-balance sheet. Therefore, the credit of the shareholder and Government contracting authority does not get affected. This financial scheme offers a better credit margin to lenders while shifting some of the risk from the sponsors to the lenders.

About Finline!

Finline is an online platform for creating financial reports for getting bank loans and investments. It’s like ‘Canva’ but for financials. If you are an entrepreneur looking for a bank loan, you must have a well-crafted project report. We, at Finline will help you with that. Our team will help you create a powerful business plan in ten minutes. That too in your language. All public and private sector banks working in India accept our project report. Click to create your report.