Project finance is termed as the long-term financing of infrastructure, industrial projects, and public services using a non-recourse or limited recourse financial structure. To finance the project, equity and debt are used to finance the project that is paid back from the cash flow generated by that project. The project finance model is generally used to finance natural resource projects or long-term infrastructure that includes a variety of energy (e.g. wind, solar and hydro) and infrastructure (e.g. roads, schools and hospitals) assets.

Sources of Project Finance

Project finance is generated from a variety of sources. The primary sources include equity, debt and government grants. Financing from these alternative sources has significant implications on the project’s overall cost, ultimate liability, cash flow, and claims to project incomes and assets.

Sectors Suitable for Project Finance

Project financing in India is used for both greenfield and brownfield projects in sectors such as:

* Public infrastructure (roads, airports, metro rail, and ports).

* Energy (power generation (solar, thermal, wind, hydro), power transmission and so on).

*Construction.

* Manufacturing (cement).

* Education.

* Healthcare.

* Telecommunication.

Types of Finance

There are mainly two types of finance:

1:  Debt Finance and
2:  Equity Finance.

The other types of finance are:

* Public Finance,
* Personal Finance,
*  Corporate Finance and
* ·Private Finance.

The above types are explained in detail below:

Debt Finance:

The cash that is acquired to maintain or run the business is known as debt finance. Under Debt finance, ownership control is not provided to the moneylender; the borrower must repay the principal amount and the agreed-upon interest rate. Mainly, the interest rate is determined based on the loan amount, duration, the purpose for borrowing, the inflation rate and the specific type of finance. 

Debt finance can be defined into three types:

* Short-term
* Medium-term and
* Long-term         

Short-term Debt Finance:

 Short term debt finance is typically needed for more than one to one hundred and eighty days. They are borrowed for covering the shortage of finance and temporary or occasional requirements. Short-term finance is required for daily business activities such as paying wages to the staff or getting raw materials. Primarily, the amount of getting a short-term loan depends on the other sources of income for repaying that loan. The common form of short-term debt finance is the credit line from the business’s suppliers.

Credit cards, Trade credit, bill discounting, working capital loans, bank overdrafts, small business loans, advances from customers and working capital loans are other forms of short-term finance.

Medium-term Debt Finance:

Loans generally required for more than one hundred and eighty to three hundred and sixty-five days are called medium-term debt finance. The way of utilizing the funds is mainly dependent on the type of business. The businesses normally repay the loan from the companies’ cash-flow sources.

Long-term Debt Finance:

Long-term debt finance is the loans generally required for more than three hundred and sixty-five days. This type of finance is mainly needed for buying plants, land, restructuring offices, etc., for a business. It has a better interest rate as compared to short-term finance. It usually has a repayment duration of five, ten or twenty years.

Examples of long-term finance are Car loans or home loans. Issue of preference shares, Issue of bonds/debentures, long-term loans from the government, issue of equity shares, financial services institutions, venture funding or funds from investors is other examples of long-term debt finance.

1: Equity Finance

Equity finance is a traditional way of raising capital for businesses by issuing or offering shares of the company. This finance is mainly applied for seed funding for startups and new businesses. Well-known companies use this finance to raise additional capital to expand such business.

Equity finance is primarily raised by issues or offering equity shares of the business. Each claim is an owner’s unit for that specific business. 

The other types of finance are discussed below:

Public Finance:

Public finance includes a study of the state’s income and expenditure. It considers the government’s finances. The scope of public finance includes the collection of funds and allocation among different sectors of state activities that are considered essential functions of the government.

Public finance can be classified into three types:

* Public Expenditure
* Public Revenues
* Public Debt

1:  Public Expenditure:

Public expenditures are the expenses incurred by the government for maintenance and the welfare and preservation of the economy, society, and nation. 

2:  Public Revenues:

Public revenues include all the income and receipts, irrespective of their nature and source, which the government acquires during any given period. It will even have the loans raised by the government. It will exclusively include the income from revenue resources.

3:  Public Debt:

Public debt means the loans raised, that is, a public finance source carrying the repayment obligation to the individuals and the interest. 

Personal Finance:

Personal finance denotes the application of finance principles to the monetary decisions of a family or an individual. It includes how families or individuals get, budget, spend and save economic resources over a period, considering financial risks and different future life events. 

Corporate Finance:

Corporate finance consists of the financial activities of running a corporation. It is a department or division that oversees a company’s economic functions. The main concern of corporate finance is shareholder value maximization through short-term and long-term financial planning and different strategies’ implementation.

Private Finance:

Private finance is an alternative method of corporate finance helping a company raise funds to avoid monetary problems within a limited time frame. This method enables a company not listed on a securities exchange or is incapable of obtaining finance on such markets.

Advantages and Disadvantages of Project Finance

Project financing is a funding framework that is becoming increasingly valuable and desirable.

This is an exciting and valuable method used by many 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

* It helps to achieve economic rent.

*  Another benefit is to apply this funding model to natural resource extraction, especially when such funds are acquired at a reasonably low price or are provided for storage.

* It acts as a distribution of risk. 

* Investing in the joint venture helps the partners to reduce the project’s cost. Suppose the investment cost is high as it relates to the capitalization of the sponsor. In that case, the judgment mainly on the funding of the project funds may seriously jeopardize the sponsor’s future.

* It increases the capacity of debt.

* Using credible sources enables the project sponsor to fund the project. Based on the contracted liability, the project funds are collected chiefly.

* Reduce overall assets costs

* The project would be capable of raising money at lower costs than the sponsors if project funding helped to address overhead issues that are critical for addressing a particular topic.

* Project financing is mainly relevant when two or more manufacturers team up to construct a new production facility during a production scale economy.

* Achieving economic scope

Disadvantages of Project Finance

Project financing does not result in less costly resources under all circumstances and in all ventures; hence, contracting expenses are still very high.

* It involves complexity

*  It is based on agreements of a series of contracts with other project participants. Negotiations lead to complications and are often costly to carry out.

* Indirect Credit support

* Higher Transition costs

* Due to its complexity, it needs higher funding costs than those incurred by indirect financing. It represents the contractual costs of the financial framework of the project.

*  The cost of a loan is higher for all the lenders resulting from indirect credit assistance without exception.

Our team is acknowledged as one of the most trusted providers of Project Advisory Services based in India. We provide services to our customers relating to project Advisory services which helps finance long-term infrastructural and many other commercial projects in most efficient manner which makes us the best project finance company in Hyderabad. We have a team of experts, which clarify and streamline even the complex finance clearing problems for our honored clients. We help our clients to find the perfect project finance solutions in India with a long-term perspective. Our project finance services include: 

• To Prepare Critical Monetary Analysis ( CMA-Data)
• To Assist in obtaining finance from Bank
• Overdraft Limit
• Cash Credit Limit
• Working Capital Finance
• Term Loan
• Letter of Credit