Project Financing I - Project Management, Entrepreneurship & Small Businesses Video Lecture | Entrepreneurship & Small Businesses - B Com

hello friends in this video I am going
to talk about project financing you are
a on chartered accountant or maybe a
businessman young entrepreneur you have
conceived some idea or your company has
conceived the idea you have some project
to set up some business to set up but as
you all know and you also realize that
we need to take outside support for
putting up any long term project may it
be an industry or a business with an
investment on the offices infrastructure
or international business you must have
a report a Business Report which is
called as or known as project report
ready
when I say this it does not mean that
you are going to take only the dead
let it be even private-equity let it be
even raising funds from the other
sources but for any purpose the project
report is a must now in this video we
will keep limited our discussion on the
hard core brick and mortar project so
that we can justify with the timing and
you can also understand in detail how
the project reports are prepared how the
project financing is done so let's say
that you are setting up a factory you
have decided the location the land can
be freehold or the leasehold like in
Maharashtra MIDC you know the cost of
land the premium paid for it then your
technical team will tell you the
requirement of your civil construction
and amenities and your architect will
give an estimate of the civil work
building which is going to be built so
that is the cost of your civil work your
land and building then comes your plant
and machinery equipment amenities
utilities again here your technical team
with the support of the architects the
engineers the finance people will work
out the detailed estimate in fact the
other rather they will invite estimates
from two three parties for AV equipment
every machinery the technology and shut
it down all together in that they will
aid the installation cost the clearing
and forwarding cost the erection cost
all together become the cost of planted
machinery so we have taken the land the
building the planted machinery equipment
amenities utilities now comes the turn
for contingency
because these are the estimates the
project implementation may take one year
two year one and a half year we do not
know by the time if there is any
escalation in the cost so we provide
approximately 10% of the contingency of
building and plant and machinery you may
take even 5% it's all depending upon the
situation of the case then comes the
preoperative expenses because during the
construction period during the
implementation period whatever loan
which is taken to implement the project
you have to pay interest on that then
administrative expenses managerial
expenses and the expenses incurred which
are cannot be directly attributable to
the land building or plant and machinery
are all coupled together and made under
the head of preoperative expenses which
are later amorta size or allocated to
different asset class so this is the
total cost of project but in order to
ascertain that how much funds this
project require we have to also add in
this the working capital margin how to
calculate working capital requirement
we'll talk little later about it but in
this cost of project you to take only
the margin for working capital and after
you add the margin it becomes the total
cost of project which is required to be
funded now how this cost will be funded
so one is the equity contribution by the
promoters of the company equity can be
at par in conveyed premium depending
upon the evaluation is on that date then
comes the unsecured loan which the
promoters raise from their own resources
and then comes the term loan component
which is a very important component and
if there is any incentive available
other things as a means of finance it is
added in the means of analysis in case
of a running industry
which is going for expansion in that
case even the cash accruals from the
existing activity can also be taken as a
means of finance under the head capital
or the resources which are raised by the
promoters so this is the total means of
valence now how do you arrive generally
as per the standard norms is for the
thumb rule - this means of enhance
suppose your project cost as estimated
above is say 10 crores rupees
generally the banks in India and the
financial institutions they fund about
70 to 75% of the cost of fixed assets
towards thumb loan so once you take that
the remaining portion the promoters only
have to brought in either by way of
capital or unsecured loan or from the
internal cash accruals so this is how
this means of finals are framed now how
the loan what is the duration of loan
period how it is payable will cover it
little later after this we come to the
actual calculation of the future
profitability from this project from
which we'll come to know whether this
project can service the debt the loan or
can earn money towards the capital which
has been deployed for that you have to
make the total profitability estimates
and arrive at a ratio which is known as
DAC our debt service coverage ratio that
means the principal repayment as well as
the interest on debt which is also
required to be covered and it is not
only covered at par the coverage ratio
should be 1.5 times or 2 times depending
again upon the project the nature of the
project so friends this is how in the
project finance you frame the total cost
of project means of finance fund it
check it from the DAC our ratio whether
the project is viable to fund and then
take the diffusion accordingly in our
next video we will cover the actual
calculation of the profitability various
ratios
and how do you make the total
application for a bank or institution
for loan or a presentation to a private
equity investor thank you