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What Are the Different Sources of Project Finance?

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  • Written By: Geri Terzo
  • Edited By: Shereen Skola
  • Last Modified Date: 25 September 2016
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When developers in any field decide to launch major projects, they might have some internal capital to invest in the venture. It is common, however, for developers to turn to other sources of project finance to bring the endeavor to operation and completion. These sources could be large banks, the financial markets, or equity investors, for instance. Venture capital firms, which typically invest in start-up businesses, may be attracted to the growth that project finance allows in certain emerging sectors. International project finance can secure its own unique type of financing that might be provided by some entity that seeks to promote development of an emerging economy.

The capital markets represent sources of project finance funding. Often, investment banks provide equity and debt financing. If approved, developers can obtain non-recourse loans, which are backed by the equipment and assets used for the project, and other types of debt financing to support the duration of a venture. Financing firms could also provide equity to the developers of project finance. These providers benefit by sharing in a portion of the profits when the endeavor attains profitability. Some financing firms dedicate entire divisions to specialize in being sources of project finance.

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Venture capital represents a segment of the investment management industry that does not shun risk and often funds the early stages of new businesses and technologies. There is often an element of risk associated with project finance because financiers are extending capital to developers based on a projected future cash flow. In some cases, venture capital firms might participate as sources of funding. These firms might be most suited for supplementing other types of financing that developers are able to gain access to.

When project finance endeavors are created in other countries, including emerging market economies, there may be certain financing products designed to promote this type of activity. For instance, organizations can create investment funds that contain assets that grow based on exposure to the financial markets. Profits that are generated from these funds could be meant to serve as sources of project finance. The organizations behind the financing are likely to be selective about the types of funding provided, particular for projects that are being developed in emerging markets where the risks for repayment can be high. It's possible that large-scale projects with the greatest potential to produce the highest amount of cash flow will receive these funds.

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