Introduction
While financing foreign and domestic projects, many options for financial structures may exist. A company would select a foreign investment project option based on the risks and costs that relate to the various available options. This short paper gives a synopsis of how financing a foreign project differs from financing a domestic project.
It presents the various short-term and long-term financing sources that are available in the international financial markets. Lastly, it gives some of the risks that come with the various financing options.
How foreign project differs from domestic project
Organizations that wish to invest in foreign nations design financial structures of a foreign project with the chief intention of scrutinizing the mechanisms for capitalizing domestic and foreign funds, the equities of one market, the debt of another, and short-term and long-term financing options of their chosen project.
Project financing relies on the projected cash flows of the project, as opposed to the sponsors’ balance sheets (Hoffman, 2007, p.35). It entails financing structures that involve various equity investors (sponsors) together with a couple of bank syndicates and other lending organizations that offer loans to facilitate the operation of the project (Worenklein, 2003, p.8).
The difference between domestic and foreign project financing is that financial institutions granting loans can be both domestic and international for the case of domestic financing. In the case of foreign financing, many domestic financial institutions shun from granting loans to fund foreign-based projects.
Short-term and long-term financial sources
There are several short-term and long-term financial sources that are available in the international financial markets to finance projects. On long-term basis, financial resources can come from capital markets, mutual funds, foreign sources, and or specific financing institutions (Giddy, 2012, p.5).
Capital markets involve borrowing from banks, foreign markets, issuing of bonds, shares and debentures, and or from any international financial institutions such as the World Bank. On short-terms basis, finances can come from debt insurance, hybrid financing, and equity financing.
In the international financial markets, the most available means of acquiring finance is by borrowing from international financial institutions. Additionally, for the case of global companies, an organization can acquire finances through the issuance of bonds and shares in the international markets.
Risks Associated with the Financing Options
Although there are valid ways through which organization can obtain finances in the international financial markets, each of the ways present some risks. Some of these risks are akin to the nature of the project finance in the international platforms.
For instance, “project finance structures are exceedingly complex structures, which result in massive third-party upfront investments or deadweight costs in various legal processes, which are crucial for designing and preparing project ownership structure, loan documentation, and other contractual requirements” (Srivastava & Kumar, 2010, p.9).
Additionally, financial advisors who help in the process of financial structuring may charge fees ranging from 50 to 100 points (Brealey & Myers, 2003, p.98). Since the organizations have to incur these costs during the process of project development, in case the projects turn out infeasible, they would not recover the costs.
For this reason, some sources of project finances are unattractive. For instance, issuance of bonds and long-term loans from banks are risky in the sense that organization will have to pay any gains from loans and bonds after some specified period.
Comparatively, raising finance from issuance of shares is less risky since organizations will have to pay constant dividends once the project becomes operational and or when there is an increase in the share value.
Reference List
Brealey, A., & Myers, S. (2003). Principles of Corporate Finance. New York, NY: McGraw-Hill/Irwin.
Giddy, I. (2012). Project Financing. Web.
Hoffman, S. (2007). The Law and Business of International Project Finance. Cambridge: Cambridge University Press.
Srivastava, V., & Kumar, A. (2010).Financing Infrastructure Projects in India from Corporate Finance to Project Finance. International Research Journal of Finance and Economics, 5 (5), 7-20.
Worenklein, J. (2003). The Global Crisis in Power and Infrastructure: Lessons Learned and New Directions. The Journal of Structured and Project Finance, 3 (2), 7-11.