Project Financing –
the key facts at a glance

Key facts at a glance:

• Project financing is ideal for major investment projects such as commercial real estate, solar installations and infrastructure projects.

• Assets as collateral offer more favourable financing options.

How Do You Finance Large Projects Quickly, Effectively and Affordably?

Your company is fortunately growing with ever larger projects? But at the same time, you see the increasing risks associated with a massive scaling of your business? And capital procurement can no longer be realised through traditional corporate financing alone?

If you still do not want to leave lucrative projects to your competitors, you may in certain circumstances also turn to the innovative financing structures of project financing.

Project financing is especially worthwhile for large investment sums and is traditionally used for major plant construction projects or infrastructure investments. The funds for such financing are then provided based on the expected project viability.

If you are considering the use of project financing, you should examine the opportunities and risks of this special type of financing. Often, even for larger projects, a business loan is the better alternative to project financing. This is because many companies prefer not to accept the comparatively restrictive framework conditions of traditional project financing.

At Teylor, we are asked about project financing daily and work with many small and medium-sized enterprises on financing their project plans.

Financing Projects Quickly and Effectively – with Teylor

Project financing is no easy undertaking. Consider in advance whether you want to structure and apply for your credit project independently or with an experienced partner at your side.

At Teylor, we have experienced that medium-sized enterprises in particular have little experience with the requirements of financing larger projects, because such ventures only occur rarely or even for the first time in the company. We know this — and that is why we have specialised in it.

With Teylor, we have developed a digital lending platform that focuses on financing projects for small and medium-sized enterprises (SMEs). Through a transparent, straightforward process, we offer simple application and fast processing even for larger projects.

Find out quickly and without obligation which business loan suits you.

Teylor's offering is aimed at medium-sized enterprises that can demonstrate a minimum annual revenue of EUR 50,000 and two annual financial statements.

When Should You Use Project Financing for SMEs?

For your small or medium-sized enterprise, project financing comes into play when you want to realise large-scale projects with complex and long-term investment plans.

The type of project is not narrowly defined in traditional project financing. It can involve both commercial undertakings such as the construction of an industrial plant, as well as cultural or social matters such as energy infrastructure projects for a region.

Project financing is particularly common for national and international large-scale projects such as power plants, chemical plants, dams, refineries or pipelines. In these cases, various participants and project partners jointly realise the investment project.

How Does Project Financing Work Exactly?

With this type of financing, the project participants usually establish an independent project company. The so-called Special Purpose Vehicle, or SPV for short, takes on the management and execution of the project for the participants. The SPV is equipped with equity by sponsors, the capital providers, and can thereby independently take on debt capital.

In general, project financing is characterised by cash-flow-oriented lending, off-balance-sheet financing and explicit risk sharing.

1. "Cash-Flow Related Lending": In this project financing, the granting of credit is closely linked to the project's payment stream. Such financing relies on all of the project's payment obligations — including operating costs, interest and principal — being serviced exclusively from the expected free cash flow. Therefore, if you are considering project financing, you should calculate and document the project's viability precisely at an early stage.

   No tangible collateral is required upfront. However, this also means that the lender has no collateral for the repayment of capital for a new project and therefore usually insists on special rights. These can include participation in management, authority to monitor performance, or the right to step into certain contracts.

2. "Off Balance Sheet Financing": These project financings are generally balance-sheet neutral for your capital providers. This means the financing only takes effect on the balance sheet of the project company itself and has no effect on the balance sheet ratios of the project participants.

   They are only liable up to the amount of their capital contribution and with the assets of the project company. However, the sponsors of the company can provide guarantees or a commitment to inject additional capital.

   Furthermore, recourse to the assets of the project participants by the lenders is not possible. Therefore, carefully assess in advance what impact the project financing will have on all participants.

   Because with this type of financing, as an entrepreneur you enter into a very special relationship with your capital providers and with the other project participants. This is not always in the borrower's interest — and in this case, financing larger projects through traditional business loans via an online lending platform like Teylor can be a simpler and more strategically sensible alternative.

3. "Risk Sharing": The risks associated with a project are distributed among all parties involved in project financing. These include not only the sponsors of the project company but also the suppliers, lenders, and the buyers.

   For international services, investment or export credit insurance can be taken out. Depending on the project, government guarantees or sureties from organisations such as the World Bank or the European Investment Bank may also be provided.

   While project financing is the first choice particularly in areas of political tension, for straightforward SME projects this type of financing can be too extensive, as the complexity of participation structures is not present. Here too, you are often better advised with a business loan such as from Teylor.

What Are the Prerequisites for Project Financing?

A fundamental prerequisite for project financing is that you can already outline the entire project, including its processes and the respective technical and commercial risks. Especially in an early planning phase, this is not straightforward in most cases. It may happen that you are still missing commitments from customers or sales partners. The technology to be used in the project may also not yet be determined.

In such situations, you should immediately calculate multiple scenarios and explain them to potential financing partners. It is important to address not only the difficulties of cash flows but also procurement losses and operational risks. Project financing involving dependencies on suppliers, raw materials, logistics routes or technically unproven processes cannot be carried out without involving these as co-obligated parties.

Project Financing – By Definition Originally Designed for Large-Scale Projects

Project financing represents a special form among loans. It is about funding a time-limited undertaking — a project. In most cases, these involve quite substantial financing volumes with correspondingly large and long-term investment projects, such as the construction of complete plants, power stations or area infrastructure.

When developing a project financing arrangement, your creditworthiness as a borrower is certainly important, but above all the potential of your investment project and its future prospects for success are decisive for the financing. Important factors include, in addition to the growth prospects and revenue forecast of your project, also the expected project return as well as the projected cash flow.

Project financing is characterised above all by the fact that repayment is intended to come exclusively from the project's future earnings, i.e. from the cash flow. This places special expectations on the project to be financed, which often makes the planning and implementation of project financing complicated.

Project Financing – Pros and Cons

Whether project financing is the right path for you can only be answered on a case-by-case basis, weighing up other financing options.

The advantages:

• The involvement of third parties has the advantage that you can find fresh sources of financing and guarantors — and thereby also new risk-sharing partners. In this way, you achieve better creditworthiness.

• The organisational and financial separation of the project makes the project financing more independent of the development of the sponsor's economic situation. In doing so, risks are limited and leverage potentials, for example for the equity ratio, are utilised.

• The organisational form of a joint venture for the company can limit political risks in internationally structured projects. This makes the project more manageable through the joint management and risk sharing of all know-how and risk bearers.

The disadvantages:

• Certainly challenging is the scope and complexity of the required contractual framework and the associated higher time and effort in negotiating the contracts. Project financing can therefore already be more expensive in its planning and application than, for example, a conventional business loan through banks or online platforms like Teylor.

• Since lenders will only assume risks in exchange for corresponding risk premiums, higher capital costs must be anticipated.

A traditional project financing is the right instrument for your small or medium-sized enterprise when you want to jointly implement large investment projects with multiple participants and distribute both the risk and the project management across multiple shoulders.

If these framework conditions do not apply and you wish to independently finance large projects without establishing a separate project company, you should consider more straightforward financing instruments such as a traditional business loan through Teylor.

The Transparent Financing Application –
the Alpha and Omega

The credit decision always depends on the economic viability of the respective project. You must therefore present this in detail, as the debt capital providers use this to safeguard their position. It is important that you first determine the expected cash flow and the still bearable debt limit. You should also consider under what circumstances and with what scenarios the actual payment streams could deviate from the projected values.

Furthermore, it is advisable to obtain necessary permits before applying for financing. However, this is often not straightforward. For example, the announced construction of a wind turbine could prompt local residents to take action against it. This would inevitably lead to delays and ongoing discussions.

However, capital providers are aware of the hurdles of such investments. That is why they critically examine every concept in advance. The principle applies: the lower the capital provider assesses the risk for a successful, planned project course, the more likely and more affordable the project financing will be for you.

When the participants can demonstrate many years of successful activity in the relevant project business, this has a positive effect on the conditions of the project financing. Equally helpful are a robust timeline for the project, impeccable contract design and documented financial reserves of the project partners. These serve to compensate for any unexpected cost increases during the course of the project.

It is also important that the profitability calculation of your project shows a surplus even in stress phases. For this, a financial model is expected as a well-founded forecast of the expected payment streams. Last but not least, good credit ratings of the participants — such as the project operator, plant builder or buyer — are also conducive to the approval of project financing.