When the project method for business arose in the modern world, it was necessary to create a mechanism for raising funds. This mechanism is designed to work without cash collateral. That is, project financing is one of the ways to effectively raise funds for a specific investment project for a long period of time. According to Russian banks, this is a rare service, but nevertheless it is declared as a separate type of lending. But if the bank employees see promising professionals who have a good project on hand, they can make leniency.
What Is Project Financing
Project financing is a kind of loan from the industry of a targeted investment loan, which people take to improve their enterprises or remodel existing facilities. Concluding the results of various surveys of bank employees, specialists from the construction industry or the energy sector usually apply for such financing.
Project finance differs from other types of financing in the way it returns a loan. That is, in order to repay the loan, the money will be taken from the cash flows, which will be formed already in the course of the project promotion. According to the directors, this is an ideal and interesting way to return money, because with it you do not need to load your own balance with other obligations.
For project financing to be realized, you need to create a project company that will take on the role of the borrower and operator of the project. This will allow the company to share the risks that may accompany the project, as well as make the project more transparent and unrelated to the past.
In order for a bank to assist in financing a particular project, it needs to study not only the financial activities for the current period, but the investment project itself as a whole. That is, the bank must evaluate the effectiveness of the project, which it will finance, whether it is in demand on the market, and monitor the progress of the project implementation process at all its stages.
In addition, the bank must also conduct an analysis of the risks that are possible during the implementation of the project at each stage. This analysis also includes an assessment of sensitivity to possible deviations. For example, this may be a decrease in revenue or an increase in expenditure or an excess of the estimated cost of the construction itself.