Full project financing can be a complex and sometimes-risky financing structure. However, it can also be a very efficient and cost-effective way to finance a project when other lending options are not available. When considering 100 percent project financing, it is important to know about the financing, how it works, and the risks involved. Take a closer look at all this and more below.
What is 100 Percent Project Financing?
One-hundred percent project financing is a type of financing in which the entire cost of a project is funded by debt. This means that there is no equity investment from the project sponsors, no down payment from the borrower, and full coverage for the costs associated with the project until it is finished. The 100 percent financing model is often reserved for projects that involve infrastructure, public services, or industrial operations.
Why Choose 100 Percent Project Financing?
There are several reasons why a project sponsor might choose 100 percent project financing, including:
- It can be a more efficient way to finance a project, as it avoids the need to raise equity.
- It can be a lower-cost way to finance a project, as debt financing is often cheaper than equity financing.
- It can make it easier to get financing, as lenders are more willing to lend to projects that are fully financed.
How Does 100 Percent Project Financing Work?
Financing that involves 100 percent debt coverage typically involves a syndicate of lenders, who each provide a portion of the money to cover the costs of a project. The lenders will typically require the project sponsor to provide a security package, which may include the project assets, the project sponsor's assets, or both.
What are the Risks of 100 Percent Project Financing?
There are several risks associated with 100% project financing, including risks that:
- The project will not generate enough cash flow to repay the debt.
- The project assets will not be sufficient to cover the debt in the event of a default.
- The project sponsor will not be able to meet its obligations under the security package.
How Can the Risks of 100% Project Financing Be Mitigated?
While this type of financing does come along with risks, there are steps that can be taken that will lower the risks of the transaction. The risks of 100 percent project financing can be mitigated by selecting the project carefully and structuring the loan in a way that will be easy to pay back. For example, look for reasonable loan terms with a lower interest rate. Obtaining insurance coverage for key risks and monitoring the project closely from start to finish can also help.
To learn more about 100% project financing, reach out to a local service provider.