Loans Hard Money new york properties commercial hard illinois business hard loan money small.

Loans and finance guides at BostonApartments.com

Project financing is the process of securing long-term funds to cover the costs associated with a new business venture or significant expansion. It involves identifying and leveraging various financial sources to meet a project's capital requirements. Understanding the different types of financing available is essential for any business planning a substantial investment.

What Are the Key Sources of Project Finance?

To meet the cost of a project, a range of long-term finance sources may be considered. These typically include:

Equity Capital: The Foundation of Ownership

Equity capital represents the direct contribution made by a business's owners, typically equity shareholders. These shareholders enjoy the potential rewards of ownership and bear its inherent risks, though their liability is generally limited to their capital contribution.

From the perspective of the issuing company, equity capital offers two primary advantages:

However, raising funds through equity capital also has disadvantages:

Preference Capital: A Hybrid Financing Option

Preference capital is a hybrid form of financing, combining characteristics of both equity and debt. It resembles equity in that preference dividends, like equity dividends, are not tax-deductible payments for the company. However, it is similar to debt because the rate of preference dividend is fixed.

A key feature of many preference shares is their cumulative nature, meaning if a dividend is skipped, it typically accumulates and is payable in the future. The near-fixed nature of preference dividend payments can make preference capital less attractive as a primary source of finance. However, it can be useful when promoters wish to expand the company's net worth without diluting their share of equity, often to meet requirements set by financial institutions.

In addition to conventional preference shares, companies may issue Cumulative Convertible Preference Shares (CCPS). These shares historically carried a fixed dividend rate (e.g., 10 percent) and were compulsorily convertible into equity shares within a specified timeframe, such as three to five years from the issue date.

Debenture Capital: Understanding Debt Instruments

Debenture capital has become an important source for project financing. In some regions, three main types of debentures are commonly used:

  1. Non-Convertible Debentures (NCDs): Similar to promissory notes, NCDs are used by companies to raise debt that is repaid over a period, typically 5 to 10 years. They are usually secured by a charge on the issuing company's assets.
  2. Partially Convertible Debentures (PCDs): These debentures are partly convertible into equity shares according to pre-determined terms. The unconverted portion of PCDs remains a debt instrument, similar to an NCD.
  3. Fully Convertible Debentures (FCDs): FCDs are entirely converted into equity shares based on pre-determined terms. As such, FCDs can be viewed as a form of delayed equity investment.

Term Loans: Domestic and Foreign Currency Options

Term loans, provided by financial institutions and commercial banks, are a crucial source for financing new projects, as well as expansion, modernization, and renovation initiatives for existing businesses. These loans are typically repayable over periods such as 8-10 years, often including a moratorium period of 1-3 years before repayments begin.

Foreign Currency Term Loans

Financial institutions also provide foreign currency term loans to cover foreign currency expenditures, such as importing plant, machinery, and equipment, or paying for foreign technical expertise. Under general schemes, the periodic liability for interest and principal remains in the loan's original currency and is converted to local currency at the prevailing exchange rate for payments to the financial institutions. Companies can also directly obtain foreign currency loans from international lenders.

Exploring Euro Issues: GDRs and ECBs

Beginning in the early 1990s, many companies have utilized "Euro issues" to raise capital from international markets. Two common types of securities employed in these issues are Global Depository Receipts (GDRs) and Euro-convertible Bonds (ECBs).

Deferred Credit and Supplier Financing Schemes

Suppliers of machinery often offer deferred credit facilities, allowing payment for machinery purchases to be made over an extended period. The interest rates and payment terms for deferred credit can vary widely. Suppliers typically require a bank guarantee from the buyer when offering this facility.

Bills Rediscounting Scheme

Historically, schemes like the Bills Rediscounting Scheme (e.g., operated by IDBI in India) were designed to promote the sale of domestically manufactured machinery on a deferred payment basis. Under such schemes, the seller would realize sale proceeds by discounting bills or promissory notes (accepted by the buyer) with a commercial bank, which would then rediscount them with the financial institution. These schemes were typically for balancing equipment and machinery needed for expansion, modernization, and replacement projects.

Suppliers’ Line of Credit

A Suppliers’ Line of Credit (e.g., administered by ICICI in India) is similar to a bills rediscounting scheme. Under this arrangement, the financial institution directly pays the machinery manufacturer against usance bills that are duly accepted or guaranteed by the purchaser's bank.

Seed Capital Assistance Programs

Financial institutions have also offered "Seed Capital Assistance Schemes" to supplement the resources of promoters of small and medium-scale industrial units. These units are typically eligible for assistance from both all-India and state-level financial institutions. Historically, several schemes were formulated: