What is project financing? What are its advantages and disadvantages?

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What is project financing? What are its advantages and disadvantages?

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What is project financing? What are its advantages and disadvantages?

Explanation & AnswerSolution by a verified expert

Explanation

Project financing is a funding process where costs of a project are financed through issues of debt and equity which are paid back by the cash flows generated from the project itself. The assets of the project, interests and rights associated with the project are held as a secondary collateral with the investors.
 
Advantages of project financing:

Project financing helps to pay off project's debt with subsequent generation of cash flows.
Project financing reduces the risk of lenders by providing them collateral in the form of assets, rights and cash flows.
Project financing enables a firm to provide its personal information to a group of few potential investors and thus, keep the information confidential.
Companies can provide higher incentives to the managers based on their performance in the project with establishment of separate projects apart from the whole enterprise.

Disadvantages of project financing:

Inclusion of more parties in the project enhances its complexity.
Project financing is quite an expensive method with regard to project development and diligence processes.
Project financing requires a lot of documentation for the banks, issuing companies and individual investors.
Companies are required to hire qualified professionals for the proceedings and litigation of project financing.

Verified Answer

Project financing is a process where the cost incurred and capital issued for the funding of a project are paid back by the inflows of the concerned project.
Advantages of project financing:

It enables the payment of debt subsequently within the life of the project.
Assets of the projects are held as secondary collateral with the investors to ensure security of their funds.

Disadvantages of project financing:

Project financing is an expensive method of funding.
Project financing requires a lot of formalities and documentation that makes it a complex matter.

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