Project finance is riskier than corporate finance as it relies on future income to pay off debt. Regional preferences and economic development also affect which financing option is chosen. Corporate finance is used for restructuring and adding shareholder value, while project finance is used for large projects with repayment based on future cash flow.
There is a degree of risk associated with corporate finance and project finance. Those risk factors can be higher in project financing because this form of financing depends on income that has not yet been generated to pay down the debt. Corporate finance also introduces an element of risk. The key difference is that the merits of project finance are based on the potential of a project, and in corporate finance, capital could be extended based on the credit quality and profitability of a business.
Another difference between corporate finance and project finance surrounds the frequency with which companies resort to either option. This decision could be largely based on regional preferences driven by laws and the most prevailing economic environment in a nation. Factors such as whether an economy is similarly developed or emerging could drive a decision about which type of financing is most efficient and practical. Research has indicated that project financing is more common outside of the United States than in the United States.
Corporate finance and project finance also differ in the functions that each activity performs. A company that may be undergoing a restructuring in which the business entity needs to be broken up and certain divisions may need to be sold would turn to corporate financing to achieve these objectives. Debt or equity can be raised and sold to public investors, for example, which in turn provides the business with access to capital for operations. Similarly, a business that might need to reorganize following a bankruptcy filing could use corporate finance to gain access to capital or reorganize debt. Corporate executives also use this type of financing to add shareholder value by improving operations and ultimately generating higher profits.
In project financing, there is also financing activity, but it is linked to the creation of a large project. Financing mainly involves debt, often large amounts, but some equity can also be used. The repayment of any loan is derived from the future cash flow that is expected to be generated from the new project. Loans extended in project finance are often non-recourse and are therefore usually secured by some collateral that must be linked to the new project. In corporate finance, cash flow generated from operations, in addition to assets, can serve as collateral for creditors.
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