Project Funding and Selection

The process of funding can be defined as the act of providing financial resources, generally in the form of money, or other values such as effort or time, with the objective to finance a need, program, and project, either by an organisation or government. The word funding is used when a firm uses its internal resources to satisfy its necessity for cash, whilst the term financing is used when the firms acquires capital from external sources.

The various sources of funding include credit, venture capital, donations, grants, savings, subsidies, and taxes. In the case funding such as donations, subsidies, and grants would have no direct requirement for return of investment are described as “soft funding” or “crowdfunding”. The funds can be allocated for either short-term or long-term purposes.

Methods of Funding

1. Government Grants – Government are allowed to allocate funds itself or through government agencies to projects that benefits the public through selection process to students or researchers and even organisations. In which case, at least two external peer-reviewers and internal research award committee review each application. The research awards committee would meet some time to discuss shortlisted applications. Such that further shortlist and ranking is made, projects are funded and applicants are informed.
2. Crowdfunding – Mainly Crowdfunding exists in two forms, reward-based crowdfunding and equity-based crowdfunding. In reward-based crowdfunding, small firms could pre-sell a product or service to start a business whereas in equity-based crowdfunding, backers buys certain amount of shares of a firm in exchange of money. For reward-based crowdfunding, project creators set a funding target and deadline, those interested can pledge on the projects. Projects must reach its targeted amount in order for it to be carried out. On completion of the projects with enough funds in hand, the projects creators must make sure that they fulfill their promises by the intended timeline and deliver their products or services.
3. Raised from investors – In order to raise capital, you require them from investors who are interested in the investments. You have to present those investors with high-return projects. By displaying high-level potentials of the projects, investors would be more attracted to put their money into those projects. After certain amount of time, usually in a year’s time, rewards of the investment will be shared with investors. This makes investors happy and they may continue to invest further. In case the returns do not meet the desired level, then this could reduce the willingness of investors to invest their money into the funds. Hence, the amounts of financial incentives are highly weighted determinants to keep the funding remain at a desirable level.
4. Share Capital – Share Capital is the capital raised through the company shareholders. In exchange for their investment they receive a share of the profits through a dividend. They may also receive a capital gain through sale of their shares are some future date. There are mainly two types of shares – Ordinary shares and Preference Shares. Ordinary shares are held by the owners of the business who have a right to a share of the company profits through dividends, which vary in value depending on performance. Preference shares are less risky as the holders of preference shares are not owners of the company. They offer a guaranteed dividend although this may be less than that received by ordinary shareholders. As preference shareholders are not owners of the company they have limited voting rights.
5. Debentures – Debentures are loans are secured by a fixed or floating charge against a company’s assets. Debenture holders receive their interest payment before any dividend is paid to shareholders and in case the business goes bankrupt then the debenture holders will be preferential creditors
6. Sale and leaseback – Assets can be sold to a financial institution and then leased back for a certain term. This releases capital in assets, which can be used for investment, but should be offset by the rental payments and loss of capital growth should the assets increase in value.

Finance Process

Project development is the process of preparing a new project for commercial operations. The process can be divided into three distinct phases – Pre-bid stage, Contract negotiation stage and Money-raising stage

Funding Types

Project Funding is either from internal or external sources or a combination of both. The range of funding may vary from simple as allocation of funds from a single departmental budget, to a complex, international financing of a joint venture. At times the work may be expected to be self-funding, with revenues generated from earlier stages of work providing funds to deliver the later stages.

Features of Internal Funding

1. Internal funding are generated from reserves already allocated to operational expenditure (OPEX) or capital expenditure (CAPEX).
2. Internal funds are distributed across different subsidiary, regional or departmental budgets.
3. Total internal funding for organisational initiatives is limited, so conditions are typically attached to when funds can be committed.
4. Internal funds will often come from one or more budgets, each with its own budget holder.
5. For major, vision-led, organisational change internal funding may bypass departmental budgets and come direct from the executive board.

Features of External Funding

1. There are many forms of external funding of projects and programs including – loans in the form of overdrafts or capital, funds from shareholders through rights issues, venture capital or grants.
2. Managers and sponsors must be aware of the terms and conditions associated with external funding.
3. External funders may not be involved in the benefits of the work in any way; they may simply supply the money.

So whether it is internal or external, recipients of benefits or not, all the funders must be treated as key stakeholders and managed accordingly. For international initiatives factors such as credit guarantees, currency fluctuations and the complexity of international funding are also taken into consideration.

Methods/Means of Project Financing

1. Share Capital – It is the capital raised by a company by issue of shares. Share capital may take two forms –
2. Equity share capital – Shared held by the owners of the business. Equity share holders enjoy the rewards and bear the risks of ownership of  the business. They have a voting right but they are paid dividend only after paying dividend to preference shareholders. Dividend on equity shares depends upon the amount of profits and financial position of the business.
3. Preference share capital – Shares held by the investors who are not owners of the business. Preference shareholders do not have any voting rights but are they receive dividend at a fixed rate and before equity share holders.
4. Term Loan – Term loans are provided by Financial Institutions and Commercial banks. It represents secured borrowings for financing new projects as well as expansion, modification, renovation schemes. It can be of two types
5. Rupee term loans – They are given for financing land, building, plant & machinery etc.
6. Foreign currency term loan – They are given to meet foreign currency expenses towards import of machinery, equipment and technology.
7. Debenture Capital – Debenture capital is a financial instrument for raising long term debt capital. It may be convertible or non-convertible debentures.
8. Non-convertible debentures – They are straight debt instrument carrying a fixed rate and have a maturity period of 5-9 years. If interest is accumulated it has to be paid by the company by liquidation of its assets. It is an economical method of raising funds. Debenture holders do not have any voting rights and there is no dilution of ownership.
9. Convertible debentures – They are convertible wholly or partly into equity shares after a fixed period of time.
10. Lease Financing – It is a contract in which the owner of the asset (lessor) gives right to use an asset to the user (lessee) for an agreed period of time in return of consideration in form of periodic payments called lease rentals. It is used for expansion projects, since repayment can be done immediately through cash generated from existing facilities. It is a popular method of Project financing for large machinery, airplane, ships, property etc.
11. Unsecured Loans – In case of shortage of funds, the promoter of the business may mobilise funds from family, friend and relatives in form of unsecured loans to meet such shortage. Lenders may or may not receive any interest on the amount lend and have no control over management and decision making. In this method of Project Financing the borrower does not have to keep any collateral for the loan therefore unsecured loans are perceived as less risky.
12. Bridge Loans/Finance – These are temporary loans provided by commercial banks to promoters of a business for arranging capital cost of a project. These loans are sanctioned by banks and financial institutions to help promoters in speedy development of a project, in its absence projects may be delayed due to insufficient funds.
13. Public Deposits – It refers to funds mobilized from the public and shareholders. These deposits can be taken for a minimum period of 6 months and maximum period of 36 months. The government of India has fixed the maximum amount of deposit at 25% of the paid up share capital and free resources of the company. Only a public limited company is allowed to accept deposits from public and a private company cannot do so, however private companies can raise deposits up to 25% of the share capital from friends, family and relatives.
14. Deferred Credit – At times suppliers of plant and machinery offer a deferred payment facility under which payment of plant and machinery can be made after a certain period of time as agreed upon by the buyer and seller at the time of purchase. In order to get deferred credit a person has to furnish Bank guarantee and may even have to mortgage certain assets.
15. Incentive Sources – The Government and its agencies may provide financial support incentive to certain types of promoters for setting up industrial units in certain location. It may take form of Seed capital assistance, Capital subsidies, Tax deferment or Exemptions