At a more widespread proportion, project finance is only one aspect of the general problem of corporate finance. If numerous projects are considered and financed together, then the net cash flow requirements constitutes the corporate financing problem for capital investment. Whether project finance is performed at the project or at the corporate level does not alter the basic financing problem.

Project Finance for a constructed facilities connotes the prices in the short term that gives birth to interest for only over the long term use of the facility. Thus, prices happens earlier than the advantages, and owners of facilities must obtain the capital resources to finance the costs of construction.

No project prosper without a thorough financial implementations , and the cost required to of provide needed financing can be very large. For these reasons, attention to project finance is an important aspect of project management. Finance is also a concern to the other organizations involved in a project such as the general contractor and material suppliers. Unless an owner immediately and completely covers the costs incurred by each participant, these organizations face financing problems of their own.

Institutional Orchestration for Financing Constructed Facilities

Financing orchestration is differentiated by the owners type and the type of constructed facility. As one example, many municipal projects are financed in the United States with tax exempt bonds for which interest payments to a lender are exempt from income taxes. As a result, tax exempt municipal bonds are available at lower interest charges. Different institutional arrangements have evolved for specific types of facilities and organizations.

A private entrepreneur who wishes to embark on a large projects my use it life earning and still, seek equity partners in the project, issue bonds, offer new stocks in the financial markets, or seek borrowed funds in another fashion.

Latent funding sources of funds would include pension funds, insurance companies, investment trusts, commercial banks and others. Developers who invest in real estate properties for rental purposes have similar sources, plus quasi-governmental corporations such as urban development authorities. Syndicators for investment such as real estate investment trusts (REITs) as well as domestic and foreign pension funds represent relatively new entries to the financial market for building mortgage money.

Notwithstanding different kinds of borrowed funds, the there is a rough equivalence in the actual cost of borrowing money for particular types of projects. Because lenders can participate in many different financial markets, they tend to switch towards loans that return the highest yield for a particular level of risk. As a result, borrowed funds that can be obtained from different sources tend to have very similar costs, including interest charges and issuing costs.

In conclusion therefore, organizing finance involved a prolonged period of bargaining and reviews review. Particularly for publicly traded bond financing, specific legal requirements in the issue must be met. A typical seven month schedule to issue revenue bonds.

Assessment of Alternative Financing Plans

For the fact that there are plenty different sources and arrangements for obtaining the funds necessary for facility construction, owners and other project participants require some mechanism for assessing the different potential sources. The relative costs of different financing plans are certainly important in this regard. In addition, the flexibility of the plan and availability of reserves may be critical.

As a project manager, it is important to assure adequate financing to complete a project. Alternative financing plans can be evaluated using the same techniques that are employed for the evaluation of investment alternatives.

Loans with Bonds, Notes and Mortgages

Secured loans deals with an MOU involving the borrower and the lender , where the lender can be an individual, a financial institution or a trust organization. Notes and mortgages represent formal contracts between financial institutions and owners.

Usually, repayment amounts and timing are specified in the loan agreement. Public facilities are often financed by bond issues for either specific projects or for groups of projects. For publicly issued bonds, a trust company is usually designated to represent the diverse bond holders in case of any problems in the repayment. The borrowed funds are usually secured by granting the lender some rights to the facility or other assets in case of defaults on required payments. In contrast, corporate bonds such as debentures can represent loans secured only by the good faith and credit worthiness of the borrower.

Many other means suffix during appraisal of bond values from the lenders point of view. However, the initial lender must adjust for the possibility that the borrower may default on required interest and principal payments. In the case of publicly traded bonds, special rating companies divide bonds into different categories of risk for just this purpose. Obviously, bonds that are more likely to default will have a lower value. Secondly, lenders will typically make adjustments to account for changes in the tax code affecting their after-tax return from a bond. Finally, expectations of future inflation or deflation as well as exchange rates will influence market values.

Another common characteristic in borrowing agreements is to have a flexible interest rate. In this case, interest payments would vary with the overall market interest rate in some pre-specified fashion. From the borrower’s perspective, this is less desirable since cash flows are less predictable. However, variable rate loans are typically available at lower interest rates because the lenders are protected in some measure from large increases in the market interest rate and the consequent decrease in value of their expected repayments. Variable rate loans can have floors and ceilings on the applicable interest rate or on rate changes in each year.

Overdraft Accounts

Overdrafts can issued by banking institution to allow accounts to have either a positive or a negative balance. With a positive balance, interest is paid on the account balance, whereas a negative balance incurs interest charges. Usually, an overdraft account will have a maximum overdraft limit imposed. Also, the interest rate h available on positive balances is less than the interest rate charged for borrowing.

For a clearer understanding, the use of overdraft financing depends upon the pattern of cash flows over time. Suppose that the net cash flow for period t in the account is denoted by At which is the difference between the receipt and the payment in period Hence, At can either be positive or negative. The amount of overdraft at the end of period t is the cumulative net cash flow which may also be positive or negative. If is positive, a surplus is indicated and the subsequent interest would be paid to the borrower.

Debts Refinancing

Debt refinancing is associated with two major benefits for an owner. Debt refinancing allows play part at the intermediate stages to save interest charges. If a borrowing agreement is made during a period of relatively high interest charges, then a repurchase agreement allows the borrower to re-finance at a lower interest rate. Whenever the borrowing interest rate declines such that the savings in interest payments will cover any transaction expenses (for purchasing outstanding notes or bonds and arranging new financing), then it is advantageous to do so.

Refinancing a loan: Suppose that the bank loan shown in Example 7–4 had a provision permitting the borrower to repay the loan without penalty at any time. Further, suppose that interest rates for new loans dropped to nine percent at the end of year six of the loan. Issuing costs for a new loan would be $50,000. Would it be advantageous to re-finance the loan at that time?

To repay the original loan at the end of year six would require a payment of the remaining principal plus the interest due at the end of year six. This amount R6 is equal to the present value of remaining fourteen payments discounted at the loan interest rate 11.2% to the end of year 6 as given in Equation

Project Finance VS Corporate Finance

Our main focus was on the challenges and concerns concerns at the project level. While this is the appropriate viewpoint for project managers, it is always worth bearing in mind that projects must fit into broader organizational decisions and structures.

A construction project is only a portion of the general capital budgeting problem faced by an owner. Unless the project is very large in scope relative to the owner, a particular construction project is only a small portion of the capital budgeting problem. Numerous construction projects may be lumped together as a single category in the allocation of investment funds. Construction projects would compete for attention with equipment purchases or other investments in a private corporation.

Financing is usually performed at the corporate level using a mixture of long term corporate debt and retained earnings. A typical set of corporate debt instruments would include the different bonds and notes discussed in this chapter. Variations would typically include different maturity dates, different levels of security interests, different currency denominations, and, of course, different interest rates.

Grouping projects together for financing influences the type of financing that might be obtained. As noted earlier, small and large projects usually involve different institutional arrangements and financing arrangements. For small projects, the fixed costs of undertaking particular kinds of financing may be prohibitively expensive. For example, municipal bonds require fixed costs associated with printing and preparation that do not vary significantly with the size of the issue. By combining numerous small construction projects, different financing arrangements become more practical.

While individual projects may not be considered at the corporate finance level, the problems and analysis procedures described earlier are directly relevant to financial planning for groups of projects and other investments. Thus, the net present values of different financing arrangements can be computed and compared. Since the net present values of different sub-sets of either investments or financing alternatives are additive, each project or finance alternative can be disaggregated for closer attention or aggregated to provide information at a higher decision making level.

Construction Financing for Contractors

In general, the subcontractor, the cash flow profile of expenses and incomes for a construction project typically follows the work in progress for which the contractor will be paid periodically. The markup by the contractor above the estimated expenses is included in the total contract price and the terms of most contracts generally call for monthly reimbursements of work completed less retainage.

Havelet Finance Limited have the capacity to refinance business and constructed facilities. Speak to us for any of your proposed large construction projects.

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Email: credit@havelet-finance.com