Introduction
Project financing is a long-term funding framework. It supports industrial, infrastructure, or public service projects by providing the necessary funds. A project finance loan is usually approved against rights, assets, and interests associated with the project.
The repayment of this loan is done by the cash flow generation from the project. In the case of the inability to repay the loan, the lender becomes entitled to take full control of the project. The separate legal identity of the project is the best feature of the project financing.
Here, business organizations can handle the projects off the balance sheet. It will help them to earn better profit margins. This feature represents project financing as the best and most popular funding option in the eyes of the corporate world. Raise funds for your business by getting the Best Loan Services in Ahmedabad.
Advantages of Project Financing
1. Made effective debt allocation
In project financing, involved parties can negotiate the advantageous and flexible terms of funding arrangements. It enables shareholders to increase the debt amount on the project, which might exceed the financial capacity of the business organization.
Here, borrowing is viewed separately without getting affected by the credit reputation of the shareholders(sponsor). This negotiation will depend on the merits and the prospects of the project.
2. Impressive risk management
The most striking advantage of project financing is the separate legal identity of the Special Purpose Vehicle( project) from the business organizations. These separate legal identities greatly divide and dilute the risk factors. The shareholders(sponsor) of the project are immune to future fluctuations concerning the project. Here more than one party is involved in the project. This will significantly reduce the risk associated with the project.
3. Economies of scale
A special purpose vehicle(SPV)is very likely to exhibit economies of scale when it is sailed by more than one business organization. It benefits more than one scale of the economy. Two contemporaneous companies will agree to join hands for a common goal. But the condition for their association is a significant benefit from their alliance.
Disadvantages of Project Financing
1. Complexity
Project financing is established upon several contracts between multiple parties. Each contract possesses complex negotiations. If a proper discretion technique is not exercised then it becomes difficult to maintain a record of the cash flow among the various parties.
2. Compliance and Documentation
Special purpose vehicles(SPVs) have an individual legal identity. This identity is a great obstacle in raising funds from banks and financial institutions. They perform extreme scrutinization and vigilance before extending credit to Special purpose vehicles.
The reason behind these vigorous checks is that the bank can make recoveries only against the assets and cash flows of the SPVs. It makes recovery a tedious job.
Moreover, forming an SPV is a complicated process. Even after their formation, SPVs will always stay under the scrutiny of the government.
3. Constant need of expert assistance
Project financing contains multiple parties and complex transactions. Therefore, seeking services from experts becomes inevitable. Experts help in setting up a dynamic credit-availing SPV model to conduct business. But the constant services of the experts cost a handsome amount that might become a burden on the newly formed SPV.
Conclusion
We hope that this blog will bring you a better understanding of project funding. It will surely help you in taking appropriate funding decisions for your business. Funding is as essential to business as oxygen is to life. And project financing is one of the best ways to raise funds for your business. If you are interested in gaining funds through project financing then AGIL Finance caters a prominent Project Funding services in Ahmedabad.
At AGIL, you will get the best financing services and funding options. Our sole aim is to provide excellent loan services with minimum documentation, and prompt disbursal. Contact us at info1@agil.co.in to know more about our services.
