Project financing is a funding framework that is becoming increasingly valuable and desirable and the scope of the initiatives can be supported in this manner.
This is a very interesting and valuable method used for a great number of industries around the world.
Project financing is a technique that has long been applied in developing countries and is used to optimize outcomes within financial means.
Advantages of Project Finance
- Achieving economic rent
One specific benefit of project financing is the application of this funding model to natural resource extraction, particularly in the time when these funds are provided for storage or are acquired at reasonably low prices.
- Risk Distribution
The joint venture invests and helps the partners to reduce the cost of the project. If the investment cost is high as it relates to the capitalization of the sponsor, the judgment mostly on the funding of the project funds may seriously jeopardize the future of the sponsor.
- Increase in debt capacity
The company’s project financing enables the project sponsor to fund the project using credible sources. The project funds are collected mostly based on the contracted liability.
a)The purchase concludes a long-term product/service purchase contract.
b)If the contractual provisions are established to ensure that the program’s free cash flow is provided to provide that the debt is serviced in full under reasonable terms.
- Reduce overall assets costs
If project funding helps address overhead issues that are critical for addressing a particular issue, the project would be capable of raising money at lower costs than the sponsors.
Compared to investments, the project organization can get a greater level of debt than the sponsors could do in return for equity capital.
- Achieving economic scope
Project financing is mainly relevant in the case of two or more manufactures teamed up to construct a new production facility during a production scale economy.
Disadvantages of Project Finance
Project financing doesn’t result in less costly resources under all circumstances and in all ventures, hence the contracting expenses are still very high.
The funding of the project is based on a series of contracts involving agreements with all project participants. Negotiations themselves can be very complicated and often costly to carry out.
- Indirect Credit support
The loan cost is higher for all the lenders without exception, resulting from indirect credit assistance.
- Higher Transition costs
It needs higher funding costs relative to those incurred indirect financing because of its complexity. It represents the contractual costs in the design of the financial framework of the project.