Project financing: features and essence

The concepts of “project financing” (PF) and “project financing” are not the same, since there are many ways of financing, and PF is one of them.

Project financing can be explained in simple terms as follows: credit funds are provided for a specific project after its future cash flows have been assessed. To implement a project, it is customary to create a new company called an SPV (special purpose vehicle) or SPE (special purpose entity).

Project financing can be compared to a construction set: the loan amount, repayment terms, etc. The conditions are selected individually for each project.

The project financing mechanism implies a joint investment of funds in the project, up to 70-90% can be borrowed. In some cases, the bank is ready to finance the project at 100% using property as collateral. As a rule, credit funds are allocated to the project in parts for the stages of implementation specified in the business plan.

Sources of project financing funds can be divided into 2 groups:

• equity capital;
• borrowed capital;
• PF is usually provided by one bank. For the implementation of particularly large projects, several banks may participate in financing.

Banks select projects for financing based on the size of the future cash flow of the project and the terms of repayment of the loan funds. And private investors who invest their own funds in the project evaluate the success of the project for a longer term, including after the loan funds are repaid to the bank.

The essence of project financing is a comprehensive approach to assessing the risks of the project and determining the optimal amount and terms of participation of investors and commercial banks.