How Are Investment Projects Financed?

A investment project or business plan, is a proposal that is made in order to solve a present or future need, making use of a business group's resources to grow or extend return on investment

A business plan can be defined as a set of tasks or activities undertaken by a company to achieve its economic and financial goals.

This project must include the information and the purpose of the investment that is planned or thought to be made, the disbursement or expenses required for its implementation the financing, the criteria and methods that will be used to evaluate the effectiveness, the risks of the participants in the investment process and the results expected.

An investment project is done for one time and is limited in timeIn other words, it has a start date and an end date, it has specific objectives and conditions, with defined resources, responsibilities and planning. It is a complex and non-routine activity that involves multiple parties in its execution.

What is investment project financing?

The project financinginvestment It is the management and effect of financing or providing money for a company or company to cover the expenses of a work or activity. It is usual that it is channeled through credits or loans.

It is a technique that is being used for large-scale projects, such as infrastructure works and large-scale projects worldwide, and to achieve this it uses financial engineering.

It is the long-term financing for infrastructure projects, industrial projects and public services to companies that do not have the money or their resources are limited. Debt and equity used to finance a project must be paid or repaid with the cash flow generated by the project itself.

Financing a business plan is especially attractive to the private sector as companies can finance large projects without that the company's balance sheet is used, that is, its assets do not appear on that balance sheet, however, they remain assets of the company.

Key elements in financing an investment project.

To the prepare a financing plan For an investment project it is vital to take into account some key elements that are present in a typical financial structure. Among them are the following:

• Serve as a vehicle for special purposes of the company project without taking into account previous business.
• The only activity of a company is to develop a new project, there is no new flow of income during the phase of construction and debt service will only be possible once the project is online during the operations.
• There are limits or no resources for project sponsors. (The shareholders of the company's project are responsible only for the amount of money they have contributed).
• The project remains off the balance sheet for the participants and the host government.

Advantages and characteristics of investment project financing.

As is known, the financing of an investment project seeks achieve capital resources necessary for its development and this must be done in the best possible conditions and advantages. To do this, it is important to consider or look for the following:

• Achieve the longest possible term, the interest rate has less impact than the cash flow.
• It reduces the risk of financing due to non-payment of amortizations and the consequent surcharge for costs.
• He prefers financing with a fixed interest rate which reduces the risk of inflation, devaluation and recession.
• Allow a treatment of debt financed with assets off the balance sheet.
• Avoid the negative impact of a project and the creditworthiness of sponsors.
• You get better financial conditions when the credit risk of the project is better than the creditworthiness of the sponsors.
• It allows creditors to independently evaluate or value the project.
• You get better treatment of the tax rate for the benefit of the project, the creditors, or both.

Financing sources for an investment project.

Financing for investment projects is, in short, the act of equipping a company, individual or organization, the money or credit required to start and develop a draft. Here are some of the most widely used sources of financing today.

• Friends, family and close people. It does not require great justifications and it is very flexible to determine the return. It is generally used by young, inexperienced entrepreneurs.
• Business Angels. They are private creditors who give up their capital, their experience and their market contacts. Their profile is that of entrepreneurs and they act informally.
• It is a financing mechanism in which small amounts of money are contributed where many people participate. In other words, the entrepreneur requests financing from the community, generally through the internet.
• Bank credit. It's one of the most traditionally used options, it's fast, and it's a solid font. It is not easy to achieve because only realistic and solvent projects will achieve it where the use that will be made of the money and how it will be reimbursed is exposed with great precision.
• Venture capital. The entrepreneur takes the capital shares of those companies that are not listed on the Stock Exchange. This together with the banks are the other source of professional financing, they are legally regulated. Mainly used by companies already in operation and with great potential to grow.
• Participatory loan. The sponsor believes in the project and bows to the luck of the entrepreneur. It is used in high-risk projects, but with strong potential for growth.

Finance an investment project it is not always a simple task. More and more ways to obtain funds to start a business are emerging, knowing different options will allow to adopt the form that best suits the needs of the project.