In the world of business and investment, two popular financing options are project finance and acquisition finance. While there are similarities between the two, there are also significant differences that need to be fully understood in order to make informed decisions. In this article, we will conduct a comparative analysis of these financing options and explore nine key differences between them.
1. Purpose
The primary difference between project finance and acquisition finance is their respective purpose. Project finance is utilised to finance large-scale projects such as infrastructure, construction or energy production, while acquisition finance is used to acquire existing businesses or companies.
2. Cash Flow
The assessment of cash flow differs between the two financing options. In project finance, lenders evaluate the cash flow of the project to assess its viability, while in acquisition finance, the lender focuses on the borrower's cash flow and creditworthiness to determine the viability of the investment.
3. Collateral
Collateral requirements differ between the two financing options. Project finance typically requires collateral in the form of the assets of the Special Purpose Vehicle (SPV) or project company, while acquisition finance requires collateral in the form of the assets of the business being acquired.
4. Security
Project finance lenders are usually secured creditors, which means they have priority access to project assets in the event of a default. In contrast, acquisition finance lenders may be unsecured creditors and have less priority in the event of a default.
5. Risk
Project finance is considered to be more risky than acquisition finance, due to the complexity of the projects being funded. Conversely, acquisition finance is generally considered to be less risky, as it involves acquiring an existing business with a proven track record.
6. Due Diligence
In project finance, extensive due diligence is necessary to assess the feasibility and potential risks of the project. In acquisition finance, due diligence is focused on the financial performance and stability of the business being acquired.
7. Repayment
Project finance loans are typically repaid through the cash flows generated by the project, while acquisition finance loans are usually repaid by the borrower based on their ability to generate cash flows from the acquired business.
8. Structuring
Project finance requires a complex legal and financial structuring process that aims to minimise risk and maximise returns. In contrast, acquisition finance typically involves a simpler financing structure that is based on the creditworthiness of the borrower.
9. Funding Sources
Project finance is typically funded by a consortium of lenders or investors, while acquisition finance is typically funded by a single lender or financial institution.
In conclusion, both project finance and acquisition finance are valuable financing options for businesses and investors. However, understanding the key differences between them is crucial for making informed decisions. By examining differences in purpose, cash flow, collateral, security, risk, due diligence, repayment, structuring, and funding sources, one can better determine which financing option is best suited for their business or investment activities.
Enquiries
For further information, please contact info@langdoncap.com
About the author
Sabbir Rahman is Managing Director of Langdon Capital and a Partner at Bridging Funding. He has held prior roles with Morgan Stanley, Lazard and Barclays Investment Bank. He has executed over £60 billion in notional value of transactions across financing, M&A and derivatives with global corporates, private equity funds and financial sponsor groups.
About Langdon Capital
Langdon Capital provides in-house transaction services to C-suites and Boards of publicly-listed and PE-backed businesses during the negotiation, execution and due diligence of corporate finance and capital markets transactions and senior interim resourcing solutions across finance, treasury, strategy and corporate development | contact info@langdoncap.com | visit www.langdoncap.com
About Bridging Funding
Bridging Funding is a private credit fund engaged in principal lending of commercial property bridging loans in the UK and select South-East Asian markets. We lend between £200k and £20m per transaction. As a private credit fund, our credit sanctioning process is leaner and more flexible than lenders funded by bank capital | contact sr@bridgingfunding.com | mention code “Langdon” for preferential rates | visit www.bridgingfunding.com
This is not financial advice or any offer, invitation or inducement to sell or provide financial products or services or to engage in any form of investment activity.
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