In the business world, everyone is looking for a good revenue with a strategy that looks promising and fulfills funding requirements. Project finance and corporate finance are two finance models that depend on equity and debts as the source of funds.

The two concepts have very subtle differences, like the purpose of financing and the security offered against financing. Before diving deeper into their differences, let’s discuss these concepts individually first.  

Understanding Project Finance 

Financing model for long and large-scale infrastructure projects is called project financing. Usually, project finance is high risk and time consuming in nature that requires special skills, experience and strategy for execution. 

• The capital infused in a project finance is limited as agreed beforehand.  
• The time horizon in a project finance matches the total life span of the project that is going on. 
• The financial structures of a project finance are highly tailored as the requirements for the business entity and that structure cannot be generally used again.  
• Financial structure requires an immediate payout of the clause with no reinvestment allowed. 
• Size of financing or cost of capital of a project finance is relatively higher.  

Size of financing is large due to the fact that it requires great mass to cover the high transaction cost, wish is high because of longer gestation period and documentation. 

Understanding Corporate Finance 

Corporate financing is a financing model where a business entity decides to consolidate all of its cash flows, from everywhere (projects and segments) under one umbrella. By doing this the business entity can easily use the available capital optimally and increase the shareholders’ value. All the risk and reward coming from corporate finance gets distributed across the entire business entity. Usually, companies planning large expansion use this model. 

• The capital infused in a corporate finance is there for an indefinite time span for equity. 
• The financial structure of a corporate finance is common and easily used again as compared to the project finance.  
• The dividend policy allows corporate management to make decisions autonomously from the respective creditors and investors. 
• Size of financing and cost of capital of a corporate finance is flexible and relatively lower.  
• Transaction cost for corporate financing is lower than of project finance due to the fact that there is more competition from providers in corporate financing. 

Key Differences between Corporate Finance and Project Finance 

Some of the key differences between corporate finance and project finance are:  

• Corporate finance is used during the start of a firm and in case of any major expansion, while project finance used by established into new projects. 
• For corporate finance, the balance sheet, cash flow, and financial strength of the entire company form the basis of credit valuation, while credit valuation of a project is based on its feasibility report, asset value, and ability to generate cash flow in the foreseeable future. 
• The assets and cash flows of the entire company are held as collateral of a mishap in corporate.  
• The transaction cost of corporate finance is low due to risk-sharing and unfussy structure, while that of project finance is high because of its high requirements and demands.  
• Risks can affect the overall operations of the entire business as risks associated with projects and business segments are merged, while projects are more ring-fenced.  

If you are the owner of a small business, corporate finance model will suit you more as project finance model is more suited for high-risk projects.  

Do you think you aren’t able to handle your finances all by yourself? Don’t worry! There is always some help available through your bank or a financial service like Finchley Business Services, so, you or your business do not have to suffer alone.