Commercial Bank Role in Project Finance and working Capital Finance
Project Finance is one of the key focus areas in today’s world because of continuous growth and expansion of the industries at a rapid rate. Project finance is a centuries-old form of financing high-risk, development-oriented projects.
Project finance is the long-term financing of infrastructure and industrial projects based upon non-recourse or limited alternative of financial structure where project debt and equity used to finance the project are paid back from the cash flow engendered by the project.
They are most ordinarily non-recourse loans, which are fortified by the project assets and paid entirely from project cash flow, rather than from the general assets or creditworthiness of the project sponsors, a decision in part braced by financial modeling.
Methods of Project Financing
A survey said that 90% of respondents identified money as the greatest obstacle to implementation of any project.
The various sources of finance can be broadly divided into two categories, viz. equity capital and debt capital (borrowed capital). The combination of equity and debt should be judiciously chosen, and it will vary according to the nature of the project. The project manager can choose any one or a combination of two or more of these methods to finance the project.
- Share capital – equity capital and preference capital.
- Term loan
- Debenture capital
- Commercial banks
- Bills discounting
Working Capital Financing by Commercial Banks
The working capital financing by commercial banks is an important part of corporate finance. The small and medium scale businesses often face the requirements of credit for their business operations. The commercial banks offer special working capital financing services for the businesses.
Many a times the small and medium scale businesses fail to get the traditional loan from the banks. The businesses then need to go for the working capital financing from the banks. There are various forms of financing available for the working capital financing loans. The major categories of working capital financing by commercial banks are short-term loans, short-term credits, treasury lines and overdrafts.
The short term working capital financing are generally provided by the commercial banks over a short period of 3, 6, 9 or 12 months. The short term financing is addressed to deal with special purposes such as financing investments or financing the receivables. The commercial banks also offer short-term credit facilities that are generally used by the business on rotational basis in order to meet the general working capital financing requirement on a continuous basis.
In case of the short-term credit facilities, the loans are generally offered for the term periods of 1 or 3 months.
On the other hand, treasury lines are offered for non-standard tenors.
The commercial banks offer working capital financing services that are designed to suit the specific requirements of the businesses. The banks are backed with employees having sound knowledge in finance who are experienced to understand the needs of the business. These professionals also determine the criterion of the businesses and decide on the working capital cycle for the business. Generally, the working capital limits are valid for a specific time period and the loan is repayable on the demand.
With the working capital financing, the businesses can have loan against their income stream. This is considered to be the main facility of the working capital financing. The commercial banks can purchase the accounts receivables of the businesses and lend the credit on account of that. The commercial banks also offer working capital loans by acting as a lessee and holding the lease of business equipments.