Among the most important reasons that can push a company to consider project financing is the possibility of limiting the impact on its financial statements of a possible failure of the project, a possibility that becomes crucial if the project is of a high size compared to the asset base of the project company
One element in favor is the financing method and its accounting treatment. In fact, with project financing, companies can access new "off-balance sheet" loans, thus avoiding their debt ratios.
With project financing, companies can benefit from high leverage. With a "large" expected cash flow and a coordinated system of underlying contracts, a high debt ratio can be set up on the project, with percentages ranging from 70% to 90% compared to equity capital.
Project financing for companies also presents contraindications
The financial cost of an operation of this type is higher than a bank loan of the same amount and characteristics.
Il coinvolgimento di più finanziatori e di numeroso contraenti per dar luogo ad una struttura contrattuale coordinata e coerente richiede tempo e competenze specifiche. che di riflettono in elevati costi legali, tecnici e finanziari.
The involvement of several donors and numerous contractors to give rise to a coordinated and coherent contractual structure requires specific time and expertise. that reflect in high legal, technical and financial costs.
However, project financing applies regardless of the size of the project.
Furthermore, in such operations, the control of the banks on the project is very strong and concerns all aspects. This can be unwanted by businesses.
Main misunderstandings on project financing
Among the most common ideas regarding project financing is the widespread belief that the contribution of risk capital in the SPV, project company, by the promoters is necessarily modest.
However, even if project finance is often a feature of high leverage, the bursts are mainly implemented in the form of credit rather than risk capital.
If so, banks are not willing to take full commercial risk, typical of shareholders, and will evaluate the debt-to-equity ratio based on the commercial risk of the project.
Forms of intervention by the banks
Banks consider project financing primarily as a technique of financing investments rather than a form of venture capital participation in new business ventures. Their intervention as a partner in the project is therefore a rare element.