Project Financing provides access to working capital and commercial lending by using the proceeds from an upcoming project or an event as collateral. The difference, however, between Project Financing and Contract Financing is that Project Financing relies on progress payments being made throughout the term of the project while Contract Financing is paid in a lump sum.
Project Financing is very similar to Contract Financing in that it allows a company to obtain a loan based against a confirmed project and contract. In a Project Financing Loan, the loan proceeds are dispersed based on the project milestones, which enable the borrower to receive the liquidity they need throughout the completion of the project timeline.
Project Financing creates an innovative capital structure, which provides a company with the benefits of a traditional loan, but with more flexible underwriting requirements. Many companies that may not qualify for traditional commercial loans are able to receive Project Financing.
Project Financing can be an effective financing tool for companies in a variety of industries and stages. It provides short-term capital to companies that may not be able to access traditional commercial loans or that face other liquidity challenges.
Who Can Benefit from Project Financing ?
Any entrepreneur who may not have the credit history, meet traditional lenders’ time-in-business requirements, or the financial performance to borrow from a bank can benefit from Project Financing. It also is ideal for companies that need liquidity, but do not want to dilute their company by raising money from an outside investor.
Is Project Financing Right for Your Company?
There are many small and midsize companies that can benefit from Project Financing. Understanding when your company should utilize this unique liquidity and financing tool can make a significant difference in the growth, profitability and long-term value of your company.
There are many scenarios in which Project Financing may be the right choice for a company:
Financing a Project Development
Companies that develop a project after receiving a contract from a buyer can often benefit from Project Financing.
Project Financing allows a company to borrow against future cash flows; enabling the company to gain the liquidity it might not otherwise have access to.
This can give the company the capital it needs to develop a project, even while in development, as long as they have a secured final contract.
Expanding Products and Services
Project Financing can help you significantly grow your business by giving you access to capital that you need to capture more sales.
This can mean expanding your products or services, entering new markets, or extending your geographic reach.
Because project financing is based on the expected cash flows from your new business growth, it can often be a much more flexible financing tool than traditional small business loans.
No Access to Traditional Financing
For companies with impaired credit, or, for other reasons, are unable to access traditional financing, Project Financing can provide a flexible and convenient way to access capital.
Because Project Financing is based on future cash flows, the company’s credit history will not prevent them from receiving a loan.
This can be particularly beneficial for companies that are going through a turnaround, or that have experienced a significant business disruption.
Difficulties to Attract Investors
Small businesses often have a challenge attracting investors.
Even if a business is profitable, investors may not be interested in participating based on the size of the company.
Project Financing can provide these types of companies with needed liquidity.
This added liquidity can play a key role in helping small business grow to a point at which they can attract future investment.