Corporate finance and Project finance are topics that you should study for more than 90 hours or longer if you’d like to learn the ins and outs.
Nevertheless, in this post, we will address the outline with some explanations so you’ll have an understanding of what you’re trying to do before you start researching and going into depth.
So what is corporate finance?
In an enterprise where corporate finance is conducted, the purpose of doing so is to optimize the shareholders ‘ wealth. It generally deals mostly with sources of financing as well as how to obtain an efficient capital structure.
Let’s take an example
A company Named A Ltd. lends 50% of investors’ assets with a guarantee that 15% will be returned within 5 years. And the remainder of the sum that they derive from their shareholders. Let’s assume they’re paying a dividend and the expense of the dividend is 10% of the income.
Such 15% and 10% are their operating expenses at the end of the day, that they’d like to high by all way. And they need to find a suitable debt-equity ratio (now it’s 50:50) that will minimize their capital expense.
At around the same period, if they want to reduce their overall capital expenditure (including debt and equity), they will indeed be able to sustain greater revenue or they may think about investing the money or the income into the company.
Corporate funding should help ABC Ltd. come to terms with these problems and help them seek the best solution.
Therefore, you can see why it is quite important to finance business. The above definition is just an instance, but there are several corporate finance avenues that we’ll be addressing in later parts.
So what is project finance?
It is beneficial in places in which a large industrial or renewable energy project requires finance. Project funding is utilized in a linear phase to fund the project. Not paying the entire sum upfront.
It is also off-balance sheet finance and no financial institution can see your balance sheet upfront.
Let’s take an example
In case the X project needs to be launched, the firm can approach a project finance consultant or bank or financial institution and request 10% of the project funding by showing the forecasted cash flow of the future.
Now, it’s really the bank or financial institution’s sole choice to determine whether or not to invest in it.
In general, there’s only a certain number of equity investors who invest in the project as sponsors, which are usually secured loans.
The loans are fully paid off by the cash flow of the project and the assets are seized if the parties refuse to pay back the loan.
Difference Between Project Finance And Corporate Finance
|Corporate Finance||Project Finance|
|Stages||Corporate financing has been implemented in the initial phase of the company. Whenever a company just starts up, it’s corporate finance that best suit the company to fund through.||For companies operating projects, the project financer usually seeks support while they’re in service for 3 years or less. They seek expansion during this moment.|
|Proof of concept||In this, the financier generally looks at the revenue before lending||In project finance, the sponsor or the lenders looks at the projected forecast of cash flow statements.|
|Risk||As the company is starting the risk is higher||The risk is typically somewhat lower.|
|Returns||The risks and returns on investment are higher. However, some investors consider lower returns with regard to society and ecosystems.||As the uncertainty is less and debt is paid from cash flow with interests made, the gains are typically lower.|
|Collateral||The loan is issued on the assets of the main company.||The project is used as collateral|