How to plan finance for a project most effectively?

Project financing is considered in some way or the other right from the time of project conception. Indeed project financing is intertwined with project planning, analysis and selection. As the project proposal progresses through the stages of planning, analysis and selection, the contours of project financing becomes clearer.

A capital project entails investment in land, tools, miscellaneous fixed assets, technology, distribution network, and working capital. So, the issues to be considered in financing a project are identical to hose considered in financing the business firm. What the appropriate capital structure?

 

Which financing instruments make more sense? What are the pros and cons of public and private sources of capital? How much should the firm depend on the domestic capital market? To select a particular source of finance, it will depend on the policy of the organization as well as government policy. To decide a particular source will depend on some factors.

 

1. Policy of the organization.
2. Availability of fund from particular source.
3. Rate of interest.
4. Repayment period and other terms and conditions.

 

Sources:

(a) Equity capital: It is the initial fund provided by the promoters of the firm for the project. This is the permanent long-term capital invested by the owners/promoters. The general public as well as investment institute also provide equity capital. Cost of capital under equity capital is the rate of dividend declared and paid out of profit of the company upon the completion and start of operation of the project.

(b) Preference shares: Initial funds for the project can also be raised through issue of preference shares. The difference between the preference shares and equity shares is that preference shareholders get a preference over the equity shareholders in the event of liquidation. Preference shareholders also get a fixed dividend.

(c) Debentures: The issue of debentures also raises Funds. Debentures carry fixed rate of interest redeemable after a stipulated period. At the end of stipulated period, the issuing company buys the debentures back or converts then in equity share and pays bask.

(d) Bonds: Funds for project are also raised particularly by the public sector enterprises through bonds. Issues of bonds are to get approval of the concerned authorities. These bonds can be bought back by the issuing company after completion of the stipulated period.

(e) Joint ventures: This is another new opening in the project financing through participation. This includes besides equity participation and in technology transfer also.

(f) Non-banking finance company: Non-banking finance companies undertake a wide spectrum of financial activities ranging from hire purchase and leasing to pure investments. There are many types...

1. Equipment leasing companies.
2. Loan companies.
3. Mutual financial companies.
4. Housing finance companies.
5. Investment companies.

(g) Loans from other companies: This is also termed as an inter-corporate loan. This is mainly to meet short-term needs i.e. mainly working capital requirement or the repayment of loans, which have become due for repayment, this is short-term loan.

(h) Other sources some are:

 

Banks, public deposit, financial deposit, foreign direct investments, World Bank loan, commercial papers, lease financing, Infrastructure development finance company, Contract financing, finance through special development funds, retention of profit and ploughing back of money.

 

Financial closure is the finalization of resource for the finance for the project terms and condition, rates of interest, repayment schedules, execution of agreements.

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