Project financing
Project financing is a term loan for a new unit or an expansion, repaid from the cash flow that project is expected to earn. Company Suggestion prepares the project report a bank reads before it sanctions the loan to a company or a firm.
What is a project loan?
The loan funds land, building, and plant. Repayment is scheduled from the profit the project is projected to earn, and the bank usually takes security over those assets. It is not an unsecured facility, and it is not the same thing as a cash-credit limit against stock.
The promoter brings a margin. That share is a condition of the lender. It is not a percentage fixed by the Income-tax Act, and one bank’s margin for machinery is not another bank’s margin for land.
What does the lender read?
The sanction turns on whether the report supports the repayment, not on a slogan about the sector.
- The cost of land, building, and plant, with taxes, installation, and professional fees included.
- The means of finance: promoter’s funds, the term loan, and any unsecured loans the lender is willing to count.
- The projected profit, the cash flow, and the assumptions behind both.
- The security offered, and the earlier income-tax returns of the borrower.
Working capital for stock and debtors is appraised separately. The drawing power is reset from the statements the bank asks for after disbursement. It is not a fixed slice of the term loan.
Which papers go into the report?
The report is a file, not a one-page teaser.
- A note on the product, the buyers, and the existing capacity
- Quotations for plant, and an estimate for civil work
- The constitution papers of the borrower, and the promoter’s own returns
- Projected profit and loss, balance sheet, and cash flow, with each assumption stated
- The security: what is offered, and what is already charged
What are the preparation steps?
Company Suggestion prepares the proposal in four steps.
- The project cost is listed from quotations, not from a round number.
- The means of finance are set out, including the margin the chosen lender asks for.
- The projections are built, and the repayment is tested against the cash flow.
- The report goes to the lender with the constitution papers and the filed ITR-6 or ITR-5 of earlier years.
Frequently asked questions
4 questions cover the rules that decide this registration.
Is project financing an income-tax form?
No. It is a loan proposal. The income-tax return of the borrowing company is a separate filing, in ITR-6, and lenders often ask for the filed returns of earlier years.
What margin must the promoter bring?
The lender fixes that margin in its own sanction terms. It is not a rate in the Income-tax Act, and it differs for land, building, and machinery.
Is a term loan the same as a cash-credit limit?
No. A term loan funds the project cost and is repaid over an agreed period. A cash-credit limit funds stock and debtors, and the bank resets the drawing power from the monthly statements.
What does the project report project?
The cost, the means of finance, a projected profit and loss account, a projected balance sheet, and a cash flow, each with the assumption written beside the figure.