What is project finance?

Project financing is the process of providing funds for a particular project, frequently one involving construction or finance, in which the creditors rely on working capital and project revenues to recover their initial investments.

Essentially, this means that the investor understands the financial flows and recognizes that the only way to pay off debts is by generating profits. In other words, project investments are meant to ensure that the project funds itself, and consequently, they constitute the sole guarantee of project completion.

Now let’s get straight to the point and explain the advantages and disadvantages of project financing.

Advantages of project financing

Effective Allocation of Debt

With the aid of project financing, sponsors can borrow money over and above what their parents can afford. This loan can serve as a standalone transaction. It remains unaffected by the creditworthiness of its sponsors. Therefore, depending entirely on the value and possibilities of the project, more advantageous and flexible loan conditions can be negotiated.

Management of Risk

As was already said, the segregation of the parents’ and SPV’s legal identities is what genuinely distinguishes project finance. This vastly increases diversity and dilutes the risk factor. The parent company’s stockholders are shielded from changes in the project’s outcome. The sponsors’ equity contribution is the maximum amount for which they are liable. The danger is also decreased when many companies are involved. It is common for many businesses to join together to create a single SPV. As a result, the same level of risk decreases when more parties share it, reducing each party’s exposure.

large-scale economies

An SPV will almost certainly exhibit economies of scale when launched by many parents. Only when two modern businesses can clearly understand how their alliance would benefit them will they agree to work together toward a similar objective. One organisation might significantly gain at the cost of the other, and vice versa, especially in the construction and manufacturing industries.

For the sale of extracted material, for instance, a mining business and an extraction company could agree to work together. There will be some vertical synergies. The scale and earnings that both organisations can achieve are ones that neither could have achieved on their own. They will also be able to negotiate more favourably with both buyers and sellers.

Disadvantages of Project Financing


A step up from a straightforward credit transaction is project financing. Several parties have built it through a series of contracts, each of which involved difficult discussions. If adequate discretion is not used, it may be challenging to keep track of the money’s transfer among the parties concerned. Additionally, an imagined entity (SPV) routes all transactions. As a result, it is crucial to have specialised resources that constantly keep an eye on the flow of transactions.

Documentation and Conformity

A special-purpose vehicle (SPV) must be set up, which is a laborious, costly, and time-consuming operation. Before giving the SPV any credit at all, banks and other financial institutions carry out extensive research and inspections. An SPV’s sponsors bear the burden of this agonizing procedure because they must be doubly certain of the company’s stability and prospects for the future.

A project finance initiative also attracts the government’s attention. When approving the formation of an SPV, the government is very cautious. This is because many newly formed parallel groups have a history of engaging in egregious violations of laws, including tax evasion, money laundering, and rule-breaking. Therefore, to earn its confidence, a prospective SPV must be diligent and adhere to all requirements.

Constant Professional Support

Project financing involves complex transactions and requires the participation of several stakeholders. As a result, using the services of specialists and experts is necessary. It costs a lot to set up a powerful model for getting credit and running a firm. This expense might be compared to the extravagant and expensive fees that bankers and other specialists get to facilitate project financing.


In project finance, constraints limit the recourse of the lenders. As a result, in the scenario of a default, the creditors will have access to the project’s assets to secure its execution and enforce performance obligations.

In contrast to recourse finance, where the lenders have a complete claim to the customer’s assets or cash flows, project financing does not do so. Consequently, project finance requires individuals with good financial and pertinent technical expertise.

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 need to have a well-crafted project report. We, at Finline help you with that. Our team will help you create a powerful business plan in ten minutes. That too in your language. Our reports are accepted by all public and private sector banks working in India. Click to create your report.