Project Finance | Corporate Finance ; Know the meaning | How is Project Finance different from Corporate Finance - financebrother

What is Project Finance?
Project finance is a type of finance that is used to fund development projects, long-term infrastructure projects, and industrial projects that involve high risks in their operations and are typically carried out by Special Purpose Vehicles (SPVs) with government involvement. The motive of this purpose is to reduce the huge risk associated with the projects using various funding matrices such as public private partnerships, government credits, private lending, insurance, and government credits.

Project finance refers to long-term funding for independent capitalistic projects. 

• Projects are separate economic units with isolated cash flows and assets.
• Project cash flows are sufficient to cover operating and financing cash flows.
• In project finance, debt and equity financing are for a defined period, generally the life of the project.

Corporate Finance

• Work on historical analysis to determine how companies will emerge in comparison to the past.
• It is expected that successful companies will keep growing.
• Even if it is not often the main component of the evaluation, financing is important.
• Focus on the key financial matrix to evaluate the company’s performance, such as return on investment, price-to-earnings ratio (P/E ratio), EBIT, etc.

Project Finance

• Since there is no past track record, they must be evaluated based on a streak of engineering and consulting research.
• The bank assesses the project report to evaluate the project's worth, whether it will work or not.
• All the debt will be paid by the successful projects.
• Mainly focus on debt and return related financial analysis, such as the debt-service coverage ratio, the internal rate of return (IRR), and cash flows.

Project finance reduces the risk for the sponsoring organizations, as compared to traditional corporate finance, because the project financer depends on the project's cash flow to repay the loan amount and cannot claim the sponsoring company’s assets in the event of the project's failure. Although a sponsoring company can only use project finance to generate revenue from completed projects, as the revenue will be enough to repay the loans.