Project financing is used to finance projects. Project financing thus describes a form of entrepreneurial credit. Only the future opportunities and risks of the project to be financed are taken into account as an approval criterion. The classic form of the applicant’s credit check is not used here, nor is the credit of the participating sponsors paid directly. The loan granted for the financing of a project is thus available for an investment project, for which a project company of limited duration set up for this very purpose serves as a model. The purpose of the project is that the founded economic unit itself is supported. The assignment of all rights of the project company from the contracts with third parties serves as security for project financing.
In a project financing the following explained features are usually to be found:
1. Cash-flow oriented lending,
2. The explicit risk-sharing,
3. The external financing
The cash flow oriented lending refers to the lender’s assumption that the project is also completed. As a result, the lender of project financing bears the so-called completion risk. It is clear that a project can only get a positive cash flow going if it eventually gets finished and thus fulfills its intended tasks. The risk of completion in project financing is therefore that only the repayment ability of the project is used as collateral for the repayment of the granted loans. The capitalized assets of the project company play, if at all, only a minor role.
The term “Exposure Risk Sharing” deals with the allocation of project risks in project financing. In general, a project is not only enforced by one individual, but there are several different project participants.
Sense of the explicit risk sharing is that the individual project risks are distributed subject-related. This means that each participant can also demonstrate the know-how for the individual risk of the part assigned to him. In practice, it is attempted that the risks directly related to a project’s performance are attached to the respective carrier of the service. All remaining refinancing risks are assigned to the equity and lenders or third parties in phases. Depending on the risk situation of the project, cash-flow oriented lending can be equipped with additional rights of access for external investors to the company’s equity. How exactly this right is knit depends in detail on the risk appetite of the financiers.
The term “external finance” is a bit misleading in terms of project funding, as it only makes it clear that the project sponsor’s balance sheet has little impact on equity capital commitments. Participation rates and participation rights within the project company can mean that only their part of the equity of the company has to be accounted for by the sponsors. All loans for the project are only displayed in the individual balance sheet of the project company.