- Posted by: Jackee Lu
- Category: Articles
Financing can be both in the form of debt or investment so the terms used can vary to a great extent. Structural Finance and Project Finance both are financial solutions. Various financial companies provide you such financial solutions.
Nowadays, even the online financial companies have come up with such solutions for the financial institutes to help them make out which financial solution will suit their need the best. But before you decide which solution will meet your requirements, you need to have a good understanding of both the solutions.
In a financial market, you will come across a number of ways to finance a transaction. This can include overdrafts, loans and mortgages. But these methods do not work out for multinationals, large corporations and Special Purpose Vehicles (SPVs) as they require more unique, customized and structured way to finance their requirements.
Here, Structured Finance can help solve their purpose. Structured Finance is a combination of different financing instruments that can together serve the unique needs of large firms. It includes various types of derivatives like Credit Default Swaps (CDSs) or Collateralized Debt Instruments like Collateralized debt obligations (CDOs), Collateralized mortgage obligation (CMOs), Syndicated Loans or Hybrid Securities.
Structured Finance proves to be useful when a specific project of a company involves a number of transactions. It can be used as an alternative method of financing created to fit the company’s needs and also minimize the risk involved by removing specific assets from their balance sheets.
This refers to the financing of funds for long-term projects in different sectors like industries, infrastructures and public services. This form of financing usually uses a limited resource to fund the project.
The money invested in this case is usually recovered by the cash inflows of the project through its operations. One of its prominent features is non-recourse financing, where the company takes up the project by offering itself as a Special Purpose Vehicle (SPV). The SPV is formed to acquire and manage all the funds received towards the completion of the project.
Since the SPV is a limited liability body, here the lenders are entitled to the assets of the project that stands as a guarantee of completion and the expected cash flow in the future, if the company fails to pay.
Why choose structural finance
Here are 3 reasons to choose Structural Finance over Project Finance:
- Structured financial products are usually not offered by traditional lenders. The reason behind this is since Structured Finance is essential for major capital injection into a business, big investors are required to offer such financing.
- Structured financial products are usually non-transferable. This means unlike a standard loan, they cannot be shifted from one type of debt to the other.
- Structured Finance includes a combination of different financing instruments, which can together serve the unique financial needs of the large firms.
The final words
Thus considering the visible advantages of Structured Finance over Project Finance, an increasing number of government bodies, corporations and financial intermediaries are using structured financing to manage their risk, expand their business, develop financial markets, etc.