The Key Elements Of Commercial Project Finance

By Henry Hughes

Starting a big business is something that you cannot do alone. This is because you cannot possibly have all the funds to start the business. Therefore, you will need investors and lenders to help you in financing the program. Big investments like government infrastructures, stadium and oil companies are financed by several lenders and investors. Commercial project finance is therefore the main means of financing for such programs. The profits will depend on the returns once the program succeeds. If you do not know much about this financing, below are some key elements that you should know.

The first key element is the private sector owner or partner. This is not a single person but rather a corporation or partnership. This is created for the sole purpose of funding and running a certain program. It is therefore the heart of all contracts that the program will make any borrowing, construction and even the operation on the initiative. This partnership is also known as projectco.

Another party is the sponsor of the program. This is the person that takes the role of managing the entire program. This sponsor owns the initiative. Therefore, if the initiative succeeds, he/she will receive profit through management contracts of as a result of ownership of the initiative. This individual usually covers certain liabilities and risks to make sure that the initiative succeeds.

Another key element of project finance is the lender or lenders. These include the investment banks, commercial banks and other institutional investor that will provide loans for the initiative to run. Usually, lending cannot be done by a single institution or lender. It has to be done by a group of lenders that form a syndicate and pool funds for the initiative.

Another critical element is the agent. Basically this is just one of the lenders that become appointed to become the agent. This person will thus act on behalf of the syndicate or lenders. He/she is the one who provided the loans. This individual is usually selected by the other lenders. In case the lenders propose more than one name, voting should be done so that one agent remains.

Another party of the program is called the account bank. This is also a representative of the syndicate. This account bank is the account that will hold all the cash flow. This means that all the money that the initiative will generate passes through the account bank. This is a critical role that needs trustworthy people.

The next elements involve the equity investors. These include the initiative sponsors and lenders that will not have an active role in running the program. For the lenders, they will automatically become shareholders in addition to their loan. They will thus receive enhanced returns if the program succeeds. The sponsors will also be shareholders and can buy shares from the equity investors.

Last but not least, there are contractors, suppliers and customers that play a big role in the program. The suppliers have the role of providing all materials required for the construction. The contractors then design and put up the building. Customers are there to complete the equation. Other parties are also present and you should check them out.

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