Understanding Project Funding
Financing any business project represents one of the biggest hurdles that entrepreneurs have to overcome to start up and give continuity to their businesses. Starting up or growing a business project involves making investments that require money.
Financing is the mechanism by which money is provided, or credit is granted to a person, company, or organization to carry out a project, purchase goods or services, cover the costs of an activity or work or meet its suppliers’ commitments.
Project finance is the funding (financing) of long-term infrastructure, industrial projects, and public services using a non-recourse or limited recourse financial structure. The debt and equity used to finance the project are paid back from the cash flow generated by the project.
If we do not have our resources, we have no choice but to turn to external financing sources, and the first thing that comes to mind is to get into debt with the banks. Until a couple of years ago, the options were clear:
- Invest your own money and get into debt.
- Ask for a government fund.
- Approach seed capital or investors.
- Apply for a bank loan or go to the Friends, Family, and Fools or FFF system.
As a consequence of the expansion of digital models and the global financial crisis of 2008 that caused the loss of credibility of economic systems and the decrease of credit available to Micro, Small, and Medium Enterprises, the financial industry diversified.
Financing is an essential driver for the development of the economy, as it allows companies to access resources to carry out their activities, plan their future, or expand. The most common way to obtain financing is through loans or credits from banks. In general, it is money that must be repaid in the near or distant future, with or without interest, in whole or in installments. Here are a couple of the most common options:
- In terms of timing, there are two types of financing: short-term and long-term.
- Short-term financing: this is financing with a maturity of less than one year, such as, for example, bank loans.
- Long-term financing: this is financing with a maturity of more than one year, although it may also have no deadline for repayment (when it comes from friends or relatives). This is the case of capital increases, self-financing or specific bank loans.
- Depending on where they come from, financing can be divided into external and internal.
- Internal financing: this is when the company uses its economic means, the product of its activity, to reinvest its profits in itself. It may come from reserves, own funds, amortizations, etc.
- External financing: this comes from investors who are not part of the company—for example, bank financing or financing from a sponsor.
- Financing can also be distinguished by taking into consideration the ownership of the project funding.
- Own financing: is composed of those financial resources that belong to the company and that the company is not obliged to repay, such as reserves and capital stock.
External financing: this is composed of all the money that, although it is in the company, belongs to third parties and has entered the company through loans, so that at some point, it must be repaid.