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18.4-4 Project financing is the arrangement of financing for very large individual long- term capital projects

18.4-4 Project financing is the arrangement of financing for very large individual long- term capital projects

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PROJECT FINANCING

Project finance is the finance is the long term financing for infrastructure and industrial based projects on the basis of the projected cash flows and not on the basis of sponsor’s balance sheet. The project debt and equity that is used to finance the project are paid back from the cash flows that the project generates.

Project finance is especially used in infrastructure, power production, and extraction of oil sectors. These sectors are considered to be most appropriate for developing structured financing technique. This is because they have a reasonable market, low technological risk and there is possibility that it is sold only to a single buyer or few large buyers which is based on multiyear contracts.

The entity that is need for funds to finance a new project goes in for project finance due to the following reasons:

  • The new proposal of the entity is financed on the balance sheet.
  • The new proposal is incorporated into newly created economic entity and financed off the balance sheet.

jeff jeffy answered 2 years ago
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