Project finance has evolved from being a financing technique used to fund large-scale natural resource projects (i.e. pipelines, refineries, hydro-electric power plants, etc.) to become a commonly used approach to financing a broad range of long-term, large-scale projects around the globe.
Given its very complex nature, project financing requires in-depth understanding of the financial industry, of why certain projects have failed while others have succeeded, of the required contractual arrangements to support the financing, of how to leverage cash flow projections to measure expected return rates, not to mention all of the legal issues, and much more.
How is project financing different from other financing methods?
In most cases, lenders look to the future cash flow of the project as the primary source of repayment. What serves as collateral security are the project’s assets, rights and interests. Project financing is also referred to as non- or limited recourse finance because lenders have no or limited recourse to the sponsors or shareholders of the project company for repayment of the loan. The project cannot even begin to provide for repayment until it is fully operational, and then depends on continued sound operation – and this is why its analysis is so critical. Every risk associated with the project is carefully studied before funding can be sourced.
As long as the business plan backing your vision is well designed and your project offers attractive revenue flow projections, obtaining funding is mostly a matter of knowing who to go after and how to present the opportunity to them. When reviewing project proposals, we sometimes find potential revenue models that the project owners themselves have not yet considered – and this is the added value we offer to our clients.