Project financing is a non-traditional financing technique that is now being used even by many high-profile corporate projects. It is increasingly emerging as the preferred alternative to finance fixed assets and other large-scale projects.
As a study, Project Finance includes understanding the rationale for project financing, how to prepare the financial plan, assess the risks, design the financing mix, and raise the funds.
As per the International Project Finance Association, ‘Project Finance’ is defined as “The financing of long-term infrastructure, industrial projects and public services, based upon a non-recourse (Project Finance that is secured by some sort of collateral, usually property, plant, equipment etc. is known as non- recourse financing) or limited recourse financial structure (where project debt and equity used to finance the project are paid back from the cash flow generated by the project)”
Project finance is finance for a particular project, like the hospital in our case, which is repaid from the cash-flow of that project. It is different from the traditional forms of finance because the financier principally looks to the assets and revenue of the project in order to secure and service the loan. Usually, no recourse shall be provided by the non-project assets of the borrower. In this situation, the credit risk associated with the borrower is not as important as in an ordinary loan transaction; what is most important is the identification, analysis, allocation and management of every risk associated with the project.
Figure 1: Features of Project Finance
A Term Loan is a loan with a maturity date but no amortization. The borrower pays the interest monthly, quarterly, or annually, a...
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...of credit and bank guarantees come under non fund financing. They remain dormant in the balance sheet till the transactions are within their limit.
Letter of credit – A buyer issues a letter of credit in favor of the seller from his issuing bank. After the seller dispatches his goods, he goes with the required documents to the Confirming Bank, who gives the guarantee of payment. The seller then can choose any bank for negotiation of its letter of credit.
Bank Guarantee – Bank issues guarantee that in case of an occurrence or non-occurrence of a specified event, the bank shall make good of any loss suffered. The guarantee is issued upon receipt of a request from applicant for some purpose/transaction in favor of a Beneficiary. The issuing bank will pay the guarantee amount to the 'beneficiary' of the guarantee upon receipt of the claim from the beneficiary.
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