Finance is a backbone of any business and most of the times it is the biggest obstacle to starting or run any project. Therefore, most of the businessman are constantly on a lookout for business loans and project loans either from organized or unorganized sector. There are many forms of finance and project finance is one of the old age methods of financing.
The raising of long-term finance for financing risk based projects have been in continuation for a long time and due to rapid growth and expansion of businesses, project finance and business loans has become more prominent nowadays. Here, cash flow generated from projects itself are used to repay the funds received for a project in form of debt and or equity or some other forms.
Not every business venture will have these characteristics, but most of them are applicable. The different features of project finance are listed below:
- Capital Intensive: the large projects require up front capital which can be a huge sum of money ranging from million to billion dollars. Further, the amount of monitoring and reviewing required and the contractual agreements will increase the costs of transactions.
- Highly Leveraged: there are basically two main source to raise finance: debt and equity. A project is generally a transaction involving high leverage.
- Risk Allocation: these transactions generally involve huge sum of money and can be risky. Thus, it is important to have a proper risk allocation by forming precise contractual agreements and to manage the risks with care.
Different Stages in Project Finance
There are majorly three stages involved in the process of project finance.
|Pre Financing stage||Project Identification|
|Identifying risks and minimizing|
|Technical and financial feasibility|
|Financing stage||Arrangement of equity/loan|
|Documentation and checking of rules and policies related to project|
|Post financing stage||Monitor and review project at regular intervals|
|Repayment and project monitoring|
Various Sources of Finance
There are various sources of finance or business loans are available such as:
Loans from Banks and NBFCs: Acquiring a loan from banks or NBFCs for small and medium scale projects is quite possible, just that you will be expected to convince them of your business’s ability to generate money. In case the business idea is an unconventional one, then the bank may ask for a larger collateral.
Crowd Funding: It is an innovative method of raising money for your business projects. There are a few websites that are dedicated to help people raise funds for their projects by acting like a bridge between the borrowers and the donors.
Angel Investors: Angel investors are individuals who provide capital for business projects or startups in exchange of ownership equity or convertible debt. They are many a times, retired executives or entrepreneurs who are interested in angel investing to share their experience with budding entrepreneurs and monetary returns is generally secondary. Getting an angel investor for your project has multiple benefits like capital along with important contacts and also valuable management advice.
Seed Capital: Schemes are implemented by the government to promote a new class of entrepreneurs. Under these schemes, assistance is provided in form of long term, interest free loans. Seed capital is generally provided to small and medium scale projects promoted by dynamic entrepreneurs.
Ask Friends and Family: You can always convince your close friends and family members to invest in your venture. By making a formal presentation of your business model to them in a convincing way, you can approach them to lend you money. The biggest benefit of this method of acquiring finance is that, the interest rates can be flexible.
Credit Card: A large number of small scale projects rely on business credit cards to fulfill their financial needs. It is easy to obtain a business credit card if you have a good credit history and a good credit score. However, it is advised to use the business credit card with caution as it an expensive method of acquiring finance compared to other methods.