This type of financing is where the lender accepts the future revenues as a guarantee for the amount which is lent. It is different from the traditional way of credit lending system where the loans were based on the assets and the balance sheet. In Project Finance, the loan is based on the promising nature of the project and the revenue which will be generated in the future when the project is completed. This is apt for long term infrastructure, industrial projects and public services through financial structure of non-recourse or a limited recourse.
The repayment of the debt or the equity investment is done with the cash flow generated through the completion of the project. The primary basis of this type of funding is the cash flow of the project. Assets, rights and interests of the project are considered as secondary assets. The private sector is majorly attracted toward Project Finance because it enables fund off-balance sheets (OBS).
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