What is the difference between project finance and corporate finance?

09/02/2021 | Oliver Stock, greenmatch AG

In the field of renewable energies, project finance is used in the vast majority of cases. The financing of a project-related special purpose vehicle (SPV), offers some advantages, which we have summarized in this article:

Corporate finance: what to consider

In corporate finance, numerous projects combined in one legal entity are financed. Due to this initial situation, it is difficult to distinguish or even separate individual projects from one another. Since the start and end dates of individual projects are rarely included in the evaluation, companies are often evaluated independently of time. This means that the cash flows are theoretically calculated to infinity, with contracts having to be constantly renegotiated and thus the cash flows can be relatively unstable. The contractual partner is always the company itself, which therefore bears the risks. When financing companies, banks are interested in the global cash flow and not in the cash flow of a project. The creditworthiness of the company as a whole is therefore decisive for the external financing options.

Project financing can offer more transparency and security In contrast to corporate financing, project financing can identify start and end dates, corresponding contracts and thus cash flows related to the respective project. Therefore, cash flows can be calculated and checked much better, as they contain much more detailed information. The debt financing options are calculated based on the project's own cash flow. The project company is the contractual partner and bears the risk alone. The assets and shares of the project company serve as collateral. Thus, in most cases, the parent companies cannot be held liable. Since the project duration is easy to plan, it is possible to negotiate long-term contracts that ensure stable cash flows and allow a reliable statement on the achievable return.

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