Project finance vs. corporate finance—8 key differences every developer must know
So you can fund your infrastructure projects without risking it all.
The world of finance can feel like a maze designed by folks who love jargon.
Raising capital can feel like deciphering an ancient scroll written in a language no one speaks anymore.
You're not alone.
I also don’t have a traditional finance education, so I feel frustrated when simple concepts are made unnecessarily complex.
When I finally grasp the principle at the core of what they are saying I would sigh and say to myself “is this what the fuss is about?”
Whether you're a first-time developer or a seasoned pro ready for the next big project understanding the right financing options is key.
While, you need certified, experienced specialists to work out details and complete quality execution, you the project sponsor/developer must know why they do what they do and what you must get out of it.
Your projects have the potential to reshape our continent, and access to the right kind of information on how to finance is what will get you there.
This isn’t just about raising money; it is about fueling your vision.
So let me break down what I have learned about the two major approaches for funding Infrastructure projects.
First the definitions
Corporate Finance:
This is when capital is raised using an existing corporate entity. Lenders look at the company's existing assets, liabilities, and cash flow as a basis for debt service and collateral for the loan. The financing is structured based on the value of that current business, and its net assets.
Project Finance:
In project finance, the project is financed on a stand-alone basis, and a new company—called a Special Purpose Vehicle (SPV)—is registered/created specifically for the project. It involves raising financing for a specific project, with repayments or returns provided primarily from the cash flows generated from that project.
Investors evaluate the project itself (and its sponsors) and base their structuring decisions on the cash flow generated by the project and the sponsors’ capacity to deliver it.
Next, the key differences:
The entity raising the capital:
Corporate Finance: The entity is an existing company with a financial track record that is deemed a going concern in perpetuity (or God forbid, till bankruptcy)
Project Finance: The entity is the newly created SPV with no financial history, that is set up only for that purpose. may have a life limited to the project life.
The primary source of security (collateral):
Corporate Finance: lenders rely on the assets of the borrowing company as the primary source of security.
Project Finance: lenders rely primarily on projected cashflows from the project for repayment and assets of the specific project itself as security too.
Accounting treatment & Balance sheet impact:
Corporate Finance: The debt appears on the existing company’s balance sheet.
Project Finance: the main debt is generally off the balance sheet for the project sponsor’s existing company, only equity and/or subordinated loans appear on the sponsor’s existing balance sheet.
Debt terms:
Corporate Finance: debt are often for shorter terms. Banks may limit their commitments to 5 years, rarely up to 10 years.
Project Finance: The debt are of longer terms, and can have maturities of 15 years or longer. Some project bonds may reach tenors of 20-25 years. Tenors typically end before material contracts (Off-take, strategic resource supply, concession, etc) or asset life of key components of the project.
Risk Exposure:
Corporate Finance: The company is fully responsible if the project doesn’t succeed. Lenders in corporate finance analyze the financial statements of the sponsoring company as the main basis of their decision.
Project Finance: The risk is contained within the project itself, limiting the liability of the project sponsors and their existing assets. Project cashflows is the primary source of decision and debt structuring.
Complexity:
Corporate Finance: typically simpler to arrange and execute, lenders in corporate finance analyze the financial statements of the sponsoring company.
Project Finance: requires more complexity as lenders do a thorough analysis of the project itself from all angles, including technical, financial, tax, and regulatory, legal, environmental, social, developmental. Often involving extensive stakeholder coordination.
Debt to Equity ratios:
Corporate Finance: more flexible debt-to-equity ratios, subject to what existing leverage (Debt-to-equity) ratios permit.
Project Finance: typically more highly leveraged, with debt portion going as high as 70% - 80% of the total project cost, while equity from sponsors (and others) could be between 20 - 30%.
When to Use Each Approach:
Corporate Finance: best for established companies with large balance sheets, funding comparatively smaller project sizes, projects seeking to expand an active site, business activity, or upgrade/replace existing operating assets.
Project Finance: best for brand new project sites, take over or operation of public assets (PPPs), or projects that need capital beyond what an existing balance sheet can collateralize.
Advantages of Project Finance for Infrastructure Developers
For sponsors just starting or expanding their infrastructure assets, project finance offers several advantages:
Access to Large-Scale Capital: Infrastructure projects require significant funding, and project finance enables developers to raise capital without putting their existing assets on the line.
Limited Recourse: Since lenders primarily rely on project cash flows for repayment, project sponsors don’t need to pledge an existing company as security/collateral. Other forms of risk sharing and security may be required, however the strength of the contracts with the parties involved to secure and protect the cashflows is a very strong requirement.
Off-Balance Sheet Treatment: This structure keeps the project’s debt separate from the sponsor’s current financials, making future financing easier.
Risk Allocation: Project finance allows for risk-sharing among multiple stakeholders, reducing the burden on any single entity. Thorough risk analysis as the project evolves through stages of development is very important.
Access to Specialized Lenders: Project finance attracts lenders who are comfortable with the risk profile and the long-term nature of infrastructure projects. These are not like commercial/deposit money banks that are limited in loan tenors they can extend.
Bringing it all home
Nigeria and Africa need what you’re creating, and the right financing can help make it happen. Bringing large-scale infrastructure projects to life requires more than just vision—it requires smart financial strategy. Project finance is a powerful tool that enables developers to build projects without risking it all.
Understanding how it works, and learning how to develop projects to effectively attract it, can turn your ambitious ideas into reality.
So,
What resonated?
What experience have you had with project finance?
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Books reviewed for this edition
Innovative Funding and Financing for Infrastructure - Jeffrey Delmon
Introduction to Project Finance in Renewable Energy Infrastructure - Farid Mohamadi
Principles of Project and Infrastructure Finance - Willie Tan
Project Financing Asset-Based Financial Engineering – John D Finnerty
Project Finance in Theory and Practice - Stephano Gatti
Public–Private Partnership for Sub-Saharan Africa - Hanna Kociemska
International Project Finance Law and Practice – John Dewar
The law and business of international project finance - Scott Hoffman
Principles of Project Finance- E.R. Yescombe