How to find investments for the implementation of a business project? There is a "classic" option - a loan in a commercial bank. You can try contacting a specialized investment or venture fund. But there is another, no less promising scenario - to involve project financing. What is this format of interaction between investor and entrepreneur?
Definition of the term
What is project finance? According to the interpretation widespread among Russian experts, this is a direction of borrowed funds in favor of objects, which implies subsequent self-repayment. How is project financing fundamentally different, for example, from lending?
First of all, a mechanism for sharing risks among those involved in the project. Another most important criterion that determines the essence of this phenomenon is the repayment of loans is assumed at the expense of a specific source, namely the revenue that the project provides. Additional investment resources are generally not considered.
With a loan, you can de facto settle accounts with the bank as you wish. This can be either revenue or a completely third-party source. This is unprincipled. However, if project financing of investment projects is carried out, then for those who invest, it is important for the object to pay for itself.
Project Finance Benefits
The phenomenon in question is considered quite new to Russia. Active use of the opportunities provided by project financing has been carried out by the players of the Russian market for about 20 years, by Western companies - about 30-40. What are the advantages of this form of finding a source of cash?
Firstly, it is targeted. This is its advantage over traditional lending. If we compare this phenomenon with venture capital investments, the degree of risk, as a rule, is not comparable, or even minimized. A venture investor can invest in a completely unsuccessful project. The minefields of project financing, as a rule, are not so crowded with explosive elements. Business in the framework of this model of relations between entrepreneurs and investors, as a rule, is conducted in a predictable framework, where there is a place for rational calculation and adequate forecasting.
Features
What are the features of project financing? First of all, the main revenue generator is, as a rule, not revolutionary technologies, but already successfully tested somewhere. This attracts many investors. Also, the number of those who are willing to invest in the project, as well as those who share responsibility, are usually much larger than with venture and loan agreements.
National importance
How significant is project financing in Russia from the point of view of the development of certain market segments? Experts believe that the role of this investment institution can be quite large for our country. According to some researchers, the growth potential of the Russian economy largely depends on the development of progressive forms of lending, which, on the one hand, would allow a reasonable degree of burden for borrowers, on the other hand, would guarantee a certain result for investors.
Industry Specifics
In which sectors is this financing method most often used? Experts believe that project financing is best compatible just with the strategically significant segments of the Russian economy - mining, energy, construction, especially in areas related to the federal road infrastructure.
Project Features
Despite the fact that among world economists there are no common approaches to determining the typical characteristics of projects funded by the mechanisms in question, some experts nevertheless identify several criteria.
First of all, long-term borrowing - about 10-20 years. With banking and venture capital raising options, these periods are usually several times shorter.
Secondly, with project financing, credit risk diversification mechanisms are used. Such as, for example, state guarantees, insurance, attracting large investors represented by federal and international banking institutions.
Thirdly, as a rule, various consulting structures (proposed by the investor or the object of funding) that are able to give an expert assessment of the prospects of the funded business model and increase its effectiveness are usually involved in participating in projects.
Terms of an agreement
The principles of project financing involves the conclusion of contracts between investors and entrepreneurs, the content of which may be completely non-standard. The structure of the agreement and legally fixed mechanisms of the rights, obligations and responsibilities of the parties can vary greatly depending on the specific project. At the same time, there is still a set of features recognized by a number of experts that are common to most business models in the framework of project financing. We list them.
- The main subject of the contract is a loan.
- Parties to the transaction are the “project engineer” and the investor (“lender”).
- The source of loan repayment is fixed - the proceeds from the project.
- Responsibility for risks is distributed between the project developer and the investor.
- Engagement of mechanisms for the redistribution of responsibility for the loan is present, although some experts believe that it often has limitations.
- The right to receive a share in the proceeds is proportional to the size of payments from each of the investors.
- A mechanism for the redistribution of shares in the project between investors in accordance with the estimated volume of risks is provided.
Investing for nothing?
In some cases, forms of project financing assume that the subject of the agreement will not only include credit funds, but also sponsorship funds (not implying obligations to return from the funding facility). Experts call the case when the subject of the contract between the investor and the entrepreneur appears only loan, "project lending."
Definition of Responsibility
Consider the nuance regarding item number 4 in the list that we made above. As a rule, there are three main options.
According to the first, the borrower is, in principle, exempted from the obligation to repay the loan. There is no so-called "recourse" - a claim for compensation for losses to the borrower. In this sense, the scheme of interaction between the entrepreneur and the investor is close to venture. This takes into account not only financial risks, but also, for example, political ones. As a rule, the conditions of the loan with this type of agreement are quite stringent.
The second option - "regression" is fully vested in the borrower. This option is very close to a classic bank loan.
But in this case, the borrower can receive investments on quite comfortable conditions.
The third scenario - responsibility is distributed in approximately equal proportions between the borrower and the lender.
In order to rely on a fair balance of obligations, an entrepreneur attracting investments needs to develop a model that will convince the partner that the resources necessary for the project are sufficiently diversified and that the probability of losses is small.
Regress as agreed
In some cases, options are allowed for determining the liability of the parties, when the entrepreneur receives some additional preferences not related to the project in return for recourse - full or expressed in prevailing proportions. This may be, for example, entry into the authorized capital of the investing company without reference to the implementation of the current project.
That is, relatively speaking, if the current business idea cannot be realized and will bring losses, then the next investor project, if profitable, will bring revenue to the entrepreneur as well. Another option: the funding facility accepts full recourse, but agrees with the lender that if difficulties arise, the loan can be repaid on favorable terms - on a flexible schedule, with a revision of the interest rate, etc.
Profitability dictates terms
The most rarely practiced option is the first. It is applicable in those areas where profitability is practically guaranteed (oil industry, export of other types of raw materials, metals that are in demand. 0. Mostly, the recourse is completely transferred to the entrepreneur. However, it is usually more profitable than a regular bank loan due to a lower rate and, as We have already said that there are benefits when repaying a loan.
Also, the borrower may agree to a full regression if the project clearly does not look profitable, or if analytics have shown that the market is not as promising as the investor wants.
Also, the lender can only agree to this option if the project does not have enough additional guarantees - state or from large banks.
Another possible scenario is that the entrepreneur agrees to a full regression if the interest on ordinary bank loans is too high for him.
Financial instruments
What financial and legal instruments are used to fund projects? Experts identify the following varieties.
- Loan agreement (usually if the source of the loan is a commercial bank) project financing.
- Contract for the supply of materials or equipment. This option is common in cases where, for example, project financing of construction is carried out.
- Agreement on the provision of certain resources for rent or leasing.
In some cases, other documents may be attached to the contract. This may be an agreement on insurance of certain risks.
Project requirements
What are the requirements for projects applying for financing under the scheme in question? We list those that often appear in expert sources.
First of all, the project should be accompanied by documentation in which there is a detailed business case for the business idea. If we are talking about a relatively standardized industry, for example, the same construction, then an appropriate estimate is made (which can also be analyzed by an investor or a bank) of project financing.
Secondly, the market where the project is supposed to be implemented should have significant capital intensity. Financing business ideas involving work in new segments that have not yet been tested by anyone is carried out within the framework of the model in question quite rarely.
Thirdly, studied the production base (or its potential) of the project. Even if the idea is good enough and the market is adequately capital-intensive, the enterprise should have the resources to implement the plan. The investor must also verify their sufficiency.
State format
In Russia, the state takes an active part in project financing. There is a special institution whose activities are carried out in this area. This is the Federal Center for Project Finance. This organization, based on information published in industry directories, is engaged in advisory activities.
The competence of this structure includes projects implemented at the regional and municipal levels. The Federal Securities Market Commission is involved in their preparation with the subsequent involvement of sources of financing of an extra-budgetary nature. The agency is mainly interested in the development of social infrastructure, transport system, utilities, as well as the energy sector of Russia. Also, the priorities of the Federal Target Program are the integrated development of those territories where infrastructure issues are of a systemic nature.
In some cases, the Federal Center for Project Finance conducts specialized financial and economic examinations, helps companies to find economic justifications in preparation for various rounds of investment. One of the main forms of conducting business with the Federal Securities Market is public-private partnerships, or PPPs. Among the areas where it is used intensively is heat supply. The federal center for project financing appeared a long time ago, in 1995. The Federal Securities Market is a subsidiary of Vnesheconombank, all shares of the center belong to this credit institution.
