equity;
borrowed capital.
Typically, project financing is provided by one bank, but for the implementation of particularly large projects, several credit institutions may be involved.
Banks select projects for financing based on the size of expected cash flows and the terms of loan repayment. While private investors invest their funds in the long-term perspective of the project's success, including the period after the loan is repaid.
Project financing involves a conduit cn phone data comprehensive assessment of the risks of the initiative and the determination of optimal conditions, including the amount and terms of participation of both investors and banks.
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Participants and risks of project financing
The following parties participate in the PF:
The first is a project organization, which is established specifically to implement a project. It has no experience, collateral or financial history, which protects investments from tax and legal risks associated with past activities.
The second party is the initiator, who launches the project and expects future income from it. The initiator also invests part of his funds and must be well versed in the area where the project is being implemented.
The third party is the lender. Most often, this is a large bank that provides the bulk of the financing. The lending institution analyzes the risks of the project and takes measures to protect its investment, for example, it can increase the interest rate if the project does not look the most reliable.
In project financing, it is important what risks the parties take on. If the initiative is expensive and has good financial prospects, then the lender can take on all the risks. This is called project financing without recourse. However, this approach is used in rare cases, since the more risks the lender takes on, the more expensive the financing is.
Another option is when the company takes on all the risks. In this situation, we are talking about project financing with full recourse. In case of failure, the borrower undertakes to return all funds to the lender. This approach is usually used for small projects with a low probability of success.
Participants and risks of project financing
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When the risks of the initiative are shared between the lender and the borrower, we are talking about project financing with partial recourse. In such a situation, the debtor, for example, the builder, assumes responsibility for the completion of the project on time. The lender, in turn, deals with issues related to possible cost overruns. Thus, both parties bear part of the risk and responsibility for the successful completion of the project.
Let's consider the types of project financing risks in Russia:
Political risks are associated with an unstable political situation, which can create economic uncertainty - this is taken into account by the lender when setting the interest rate.
Economic risks arise from errors in forecasting external circumstances such as inflation, interest rates, or consumer demand.
Operational risks are related to problems during the project execution, for example if the builders miss deadlines or technical problems occur. This can lead to delays in the delivery of the project.
Technological risks are problems with materials or equipment. For example, if low-quality blocks are delivered to the construction site, new ones will have to be ordered, which will lead to losses for the developer.
Legal risks arise if the project violates laws and lawyers fail to notice. For example, if construction requires cutting down trees in a protected area.
Reputational risks are associated with the negative reputation of the project participants. For example, if the initiator previously had outstanding loans.
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