Raising finance and ensuring good cash flow is essential if you want your construction business to run smoothly. Getting investors or fundraisers to finance new construction projects is even harder. Since almost every project is associated with a deadline or time limitation, you have less scope to spend more time looking for sources where you can get a construction loan for project finance.
Project Loan Financing
Project loan financing for businesses is a means to finance their construction projects. It is considered the financing of long-term infrastructure projects, public projects, and industrial construction projects using a non-recourse or limited recourse financial scheme. Besides, it is secured lending as it is featured by balanced project finance risk allocation arrangements.
There are different kinds of project finance risks, such as operational risks, construction risks, and political and take-off risks. Project financing is a long-term liability that relies mainly on the cash flow after project completion for its repayment with the project’s assets, and rights & interests being other alternatives as collateral.
Private sectors find construction loan project finance a more attractive option because companies are capable of financing major projects off-balance sheet.
How Project Finance Is Different From Corporate Finance
In corporate or traditional finance, the company executing the project, also called the sponsoring company, acquires capital or fund by presenting its available assets on its balance sheet to lenders. These assets serve as a guarantee or collateral for the construction loan repayment if it is unable to collect enough funds to repay the loan within the stipulated period. Thereby, the lender will repose on such company assets because they can convert them to cash and recover the investment money if the loan is not paid.
On the other hand, debt repayments in project finance don’t depend on the sponsoring company’s assets. Instead, the construction loan in project finance is repaid using the revenue that the project to be executed will generate after its completion.
Sponsoring companies must always be cautious in both types of finance options. They should consider factors, such as risks involved, the amount of capital needed, and so on. Project finance option mainly reduces risks for the sponsoring company because the lender only relies on the revenue generated for the construction loan repayment, and there is no cause for chasing the sponsoring company’s asset.
Project construction finance is also called a self-build loan or a short-term loan. While construction loan project finance is taken to be fair at risk, it has usually a higher rate of interest compared to mortgage loans or other finance options.
