Finance banner

Loans Hard Money


Project financing is the means of finance employed for meeting the cost of project. The long-term sources of finance used for meeting the cost of project are known as the means of finance. To meet the cost of project, the following sources of finance may be available:
» Equity capital
» Preference capital
» Non-convertible debentures
» Convertible debentures
» Rupee term loans
» Foreign currency term loans
» Euro issues
» Deferred credit
» Bill rediscounting scheme
» Suppliers’ line of credit
» Seed capital assistance
» Government subsidies
» Sales tax deferment and exemption
» Unsecured loans and deposits
» Lease and hire purchase finance


This is the contribution made by the owners of business, the equity shareholders, who enjoy the rewards and bears the risks of ownership. However, their liability is limited to their capital contribution. From the point of view of the issuing firm, equity capital offers two important advantages:
a)It represents permanent capital. Hence, there is no liability for repayment.
b)It does not involve any fixed obligation for payment of dividends.

The disadvantages of raising funds by way of equity capital are:
» The cost of equity capital is high because equity dividends are not tax-deductible expenses.
» The cost of issuing equity capital is high.


It is hybrid form of financing. Preference capital partakes some characteristics of equity capital and some attributes of debt capital. It is similar to equity capital because preference dividend, like equity dividend, is not a tax-deductible payment. It resembles debt capital because the rate of preference dividend is fixed. When preference dividend is skipped it is payable in future because of the cumulative feature associated with it. The near-fixity of preference dividend payment renders preference capital, unattractive as a source of finance. It is, however, unattractive when the promoters do not want a reduction in their share of equity and yet there is need for widening the net worth base to satisfy the requirements of financial institutions. In addition to the conventional preference shares, a company may issue Cumulative Convertible Preference Shares (CCPS). These shares carry a dividend rate of 10 percent and are compulsorily convertible into equity shares between three and five years from the date of issue.


In the last few years, debenture capital has emerged as an important source for project financing. Three types of debentures are used in India:
1.Non-Convertible Debentures (NCDs)
2.Partially Convertible Debentures (PCDs)
3.Fully Convertible Debentures (FCDs)
Akin to promissory notes, NCDs are used by companies for raising debt that is retired over a period of 5 to 10 years. They are secured by a charge on the assets of the issuing company. PCDs are partly convertible into equity shares as per pre-determined terms of conversion. The unconverted portion of PCDs remains like NCD. FCDs are converted wholly into equity shares as per pre-determined terms of conversion. Hence, FCDs may be regarded as delayed equity instruments.


Provided by financial institutions and commercial banks, rupee term loans are a very important source for financing new projects as well as expansion, modernization, and renovation schemes of existing units. These loans are repayable over a period of 8-10 years, which includes a moratorium period of 1-3 years.


Financial institutions provide foreign currency term loans for meeting the foreign currency expenditures towards import of plant, machinery, and equipment and towards payment of foreign technical know-how fees. Under the general scheme, the periodical liability towards interest and principal remains in the currency of the loan and is translated into rupees at the prevailing rate of exchange for making payments to the financial institutions. Apart from approaching financial institutions, companies can directly obtain foreign currency loans from international lenders.


Beginning with Reliance Industries’ Global Depository Receipts issue of approximately $150 million in May 1992, a number of companies have been making euro issues. They have employed two types of securities: Global Depository Receipts (GDRs) and Euro-convertible Bonds (ECBs). Denominated in US dollars, a GDR is a negotiable certificate that represents the publicly traded local currency equity shares of a non-US company. GDRs are issued by the Depository Bank against the local currency shares, which are delivered to the depository’s local custodian banks. GDRs trade freely in the overseas markets. A Euro convertible Bond (ECB) is an equity-linked debt security. The holder of an ECB has the option to convert it into equity shares at a pre-determined conversion ratio during a specified period. ECBs are regarded as advantageous by the issuing company because (a) they carry a lower rate of interest compared to a straight debt security, (b) they do not lead to dilution of earnings per share in the near future, and (c) they carry very few restrictive covenants.


Many a time the suppliers of machinery provide deferred credit facility under which payment for the purchase of machinery is made over a period. The interest rate on deferred credit and the period of payment vary rather widely. Normally, the supplier of machinery when he offers deferred credit facility insists that the bank guarantee should be furnished by the buyer.


Operated by the IDBI, the bills rediscounting scheme is meant to promote the sale of indigenous machinery on deferred payment basis. Under this scheme, the seller realizes the sale proceeds by discounting the bills or promissory notes accepted by the buyer with a commercial bank, which in turn rediscounts them with the IDBI. This scheme is meant for balancing equipments and machinery required for expansion, modernization, and replacement schemes.


Administered by the ICICI, the Suppliers’ Line of Credit is quite similar to the IDBI’s Bill Rediscounting Scheme. Under this arrangement, ICICI directly pays to the machinery manufacturer against usance bills duly accepted or guaranteed by the bank of the purchaser.


Financial institutions are also known as “Seed Capital Assistance Scheme”. They supplement the resources of the promoters of the small and medium scale industrial units, which are eligible for assistance from all-India financial institutions and state-level financial institutions. Three schemes have been formulated:

Special Seed Capital Assistance Scheme
The quantum of assistance under this scheme is Rs. 0.2 million, or 20 percent of the project cost, whichever is lower. This scheme is administered by the State Financial Corporations.

Seed Capital Assistance Scheme
The assistance under this scheme is applicable to projects costing not more than Rs. 20 million. The assistance per project is restricted to Rs. 1.5 million. The assistance is provided by IDBI through state level financial institutions. In special cases, the IDBI may provide the assistance directly.

Risk Capital Foundation Scheme
Under this scheme, the Risk Capital Foundation, an autonomous foundation set up and funded by the IFCI, assists promoters of projects costing between Rs. 20 million and Rs. 150 million. The ceiling on the assistance provided between Rs. 1.5 million and Rs. 4 million depending on the number of applicant promoters.


In the past the central government as well as the state government provided subsidies to industrial units located in backward areas. The central subsidy has been discontinued but the state subsidies still continues. The state subsidies vary from 5 percent to 25 percent of the fixed capital investment in the project, subject to a ceiling varying between Rs. 0.5 million and Rs. 2.5 million depending on the location.


To attract industries, the states provide incentives, inter alia, in the form of sales tax deferments and sales tax exemptions. Under the sales tax deferment scheme, the payment of sales tax on the sale of finished goods may be deferred for a period ranging between five to twelve years. It implies that the project gets an interest-free loan, represented by the quantum of sales tax deferred, during the deferment period. Under the sales tax exemption scheme, some states exempt the payment of sales tax applicable on purchases of raw materials, consumables, packing, and processing materials from within the state, which are used for manufacturing purposes. The period of exemption ranges from three to nine years depending upon the state and the specific location of the project within the state.


Unsecured loans are provided by the promoters to fill the gap between the promoters’ contribution required by financial institutions and the equity capital subscribed by the promoters. These loans are subsidiary to the institutional loans. The rate of interest on these loans is less than the rate of interest on the institutional loans. Finally, these loans cannot be taken back without the prior approval of financial institutions. Public Deposits represent unsecured borrowing of two to three years’ duration. Many existing companies prefer to raise public deposits instead of term loans from financial institutions because restrictive covenants do not accompany public deposits. However, it may not be possible for a new company to raise public deposits. It may be difficult for it to repay public deposits within three years.


With the emergence of scores of finance companies engaged in the business of leasing and hire purchase finance, it may be possible to get a portion, albeit a small portion, of the asset financed under a lease or a hire purchase arrangement. A project is financed partly by financial institutions and partly through the resources raised from the capital market. Hence, in finalizing the financing scheme for a project, you should bear in mind the norms and policies of financial institutions and the guidelines of Securities Exchange Board of India and the requirements of the Securities Contracts Regulation Act (SCRA).

Related Articles

Loans Payments
Loan Direct



Hospital financial statement
Bridging finance
finance and banking
Loans APR
Term Loans
Corporate Finance
Financial market
Loans best rates
Payday Loans

Loans Best
Loans for College


Salliemae Princetonreview

Boston Apartments Logo

space space space space space space space space space space space