What are the major sources of financing a project

Major Sources of finacing a project

Sources of finance:To answer this question we need to understand what is sources of finance.It may come from various sources. However, the major sources include equity, debt and government grants. Financing from these alternative sources have important implications on project's overall cost, cash flow, ultimate liability and claims to project incomes and assets.

Equity refers to the capital invested by sponsers of the project.where as debt refers to borrowed capital from banks and other financial institutions. It has fixed maturity and a fixed rate of interest is paid on the principal.

Equity: Which is provided by project sponsors, government, third party private investors, and internally generated cash. They require a rate of return target, which is higher than the interest rate of debt financing to compensate the higher risks taken by them.It is usually provided by the project sponsors, potentially including the contractors who will build and operate the project as well as by financial institutions. A large part of the equity (often referred to as “quasi-equity”) may actually be in the form of shareholder subordinated debt for tax and accounting benefits. Since equity holders bear the primary risks under a Public-Private-Partnership project, they will seek a higher return on the funding they provide. In some projects, the sponsors contribute to equity in the form of “sweat equity” which is not easily accepted by lenders

Debt:Which is provided by outsiders like banks and other financial instituions.They will get low interest rate when compared to equity investors, becuase the risk among theme will also be low.Generally, debt finance makes up the major share of investment needs projects. The common forms of debt are commercial loan, bridge finance, bonds and other debt instruments for borrowing from the capital market, subordinate loans. Debt foe a PPP project is normally pirced on the basis of the underlyig cost of funds to the lender along with fixed component expressed as a number of basis points to cover default risk and lender's other costs. like operating cost, opportunity cost f capital allocations etc.