What is Project Financing and Its Different Sources?

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Project financing is a means of obtaining funds for industrial projects, long-term infrastructure, and public services. Many businesses use this funding method to take care of major projects using a non-recourse or limited financial structure. There are several ways to secure project finance, such as investors, loans, private finance, equity, funds, grants, etc. The repayment is managed from the cash flow generated by the project.

It is a secured form of lending, accepting the project’s rights, assets, and interests as collateral. Project loans are useful in more than one way. It can help expand the manufacturing capacity, rent a workstation, upgrade technology, handle unexpected expenses, experiment with a new service or a product, create a cash pool, etc.

Below, we have discussed different sources from which one can obtain project financing.

  1. Business Angels

Business Angels have a vast experience in the industry they operate in. Private investors may invest in a company for capital gain. The investment is for a place on board or an equity stake.

  1. Venture Capital

Venture capitalists invest in a project for a non-executive position on the board. They provide capital in exchange for an equity share or a position at a strategic level. Once the value of shares increases, they may sell those for a profit.

  1. Loan for Business

Apart from secured lending, a company can choose the unsecured business loan that comes for a fixed tenure with a repayment plan. The cost of the loan is determined by estimating the returns from the project. The interest payment is tax-deductible in some cases. An agreement is made between the financial institution and the borrower for a specific loan amount and tenure.

  1. Overdrafts

Overdrafts are ideal for short-term finance. The period of overdraft facility is for a year or less. The interest is only charged on the amount spent from the person’s account. Such financing can be arranged quickly like business loans.

  1. Share Capital

The shareholders get profits from dividends. This share of profit is derived from ordinary shares (owned by business owners who can share profits of an organization from dividends) or preference shares (does not belong to company owners but a third party). Capital gain is expected from selling the shares in future. It is the company shareholders who raise the Share Capital.

  1. Debentures

Debenture loans come with a fixed or a floating rate and are provided against an organization’s assets. The debenture holders receive payment of interest before the shareholders receive their dividend payment. If the business fails, then these holders are liable as preferential creditors.

A project loan offers a great opportunity to fund providers and investors to be a part of the company’s growth process and share its profits. The above-mentioned sources for project financing are crucial for new companies. Apart from these sources, a few others to mention are project grants and government funding.

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