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 singapore business email list 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
Source: shutterstock.com
When the risks of an 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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3 Basic Principles of Project Finance
Effective project management requires a dedicated team to monitor task deadlines, create detailed estimates, and track expenses. In these situations, the company's project financing is used to simplify risk and profitability assessment, simplify document flow, and identify sources of profit.
The most important thing is that the project is profitable and financially sustainable. The main focus in organizing the process is on risk distribution.
Profitability
Investors are looking for projects that will generate good income. Payback and profitability are the most important characteristics that should be taken into account by sponsors.
Investors look first at the potential profit of the project, not at the resources of the borrowing organization. The guarantee is the cash flows that the project will bring after completion.
Profitability
Source: shutterstock.com
Participants need to decide how to distribute the investment. Sponsors prefer that the borrower also invests his money, but if the idea looks promising and the debtor is really reliable, then investors can make concessions.
Self-sufficiency
Projects are started by a team of specialists under the guidance of their manager. This usually happens through the opening of an SPV company.
This approach has several advantages:
investors can more easily assess risks, plan return on investment and organize financing;
the debt obligations of the project company have been determined;
a team of specialists increases the speed and efficiency of initiative implementation;
Once an idea is launched, its profits are kept separate and not mixed with the income from other projects within the organization, making it easier to assess the success of various initiatives.
Residential complexes, shopping centers, educational institutions and cottage villages are all self-sufficient projects.
Risk sharing
In large and complex projects, risks are shared between the developer and investors. This is an important step in project management.
In some cases, lenders may take on all the risks themselves. This practice is popular with large, expensive ideas.
The borrower can assume full responsibility for the project's execution and profitability. This is applicable for smaller projects.
Most often, the borrower and investors share the risks. For example, the developer is responsible for the construction on time, and the investors are responsible for the accuracy of the budget calculation.