Project finance in lease financing viola-funding September 25, 2023

Project finance in lease financing

Lease financing in project finance
Lease financing in project finance

Given the legislative complexity and numerous market barriers, the organizers of project finance (PF) schemes have to make a lot of efforts to effectively organize Lease financing in project finance. The key to success should be a rational contractual structure of the lease agreement, which protects the interests of all project participants.

Lease financing in project finance can reduce the risk of financial losses during the development of new projects and, to a certain extent, simplify the process of obtaining loans.

As a powerful stimulus for business, lease financing can help companies upgrade production assets, accelerate the introduction of new technologies, reduce the time it takes to launch new products, and simplify the supply of innovative equipment and its maintenance.

In other words, lease financing serves as an important tool for upgrading the industrial potential of enterprises and increasing the efficiency of investments and innovation.

“leasing” refers to the transfer by the lessor to the lessee for a certain period of time of assets that are the property of the lessor.

Finance lease in project finance schemes

It is necessary to dwell in more detail on finance lease and leverage leasing. In the context of project finance, finance lease plays a vital role in financing investment projects, such as power plants, factories, infrastructure, etc.

Finance lease agreements are agreements that provide for the payment, within a clearly defined base period, of lease payments that are sufficient to fully reimburse the lessor’s costs associated with the acquisition of property, as well as to earn an adequate profit.

Finance lease (capital lease) is the acquisition of assets for the purpose of their subsequent transfer for temporary use for a period approaching the period of its operation and depreciation of all or most of the value of these assets. During the term of the agreement, the lessor recovers the entire value of the assets through lease payments and receives an adequate profit, and the lessee acquires ownership rights at the end of the lease agreement.

Large companies using finance lease can carry out large investment projects in order to expand existing production facilities by purchasing fixed assets. SMEs and young companies, including those at the development stage, can use leasing leverage to implement capital-intensive investment projects to acquire assets that are not available to them through bank loans or other sources of funds.

The large-scale modernization of companies and the development of large projects with a long payback period require businesses to look for new approaches to increase the scale and timing of financing and reduce the cost of attracted financial resources.

The use of leasing to finance a complex investment project gives the lessor the right, with insignificant own participation, to use tax and other benefits or preferences that apply to participants in finance lease, for example, accelerated depreciation.

Choosing leasing to finance large projects

If the analysis shows that financing through leasing will have significant advantages, then the company can make a final decision and start preparing an investment project based on leasing.

Considering leasing in the structure of project financing sources, it is important for the lessor to conduct a thorough comparative analysis of leasing and loan financing schemes.

An important place in the process of evaluating a leasing project is given to its financial evaluation, the algorithm of which is similar to the financial evaluation of any investment project. In the process of preparing and analyzing a leasing project, experts recommend strictly following the sequence and procedures for financial evaluation.

Stages of choosing lease financing in project finance:

1.Selection and formation of information base for financial evaluation.
2.Detailed analysis of the lessee’s capital structure, solvency and liquidity of its assets.
3.Selection and analysis of qualitative criteria of the lessee’s business activity
4.Planning and calculation of lease payments in the structure of the lease agreement.
5.Analysis of the financial efficiency of the leasing project.

The objective basis for determining the payment for the lease of assets is the structure of the lease payment, which is multicomponent in nature. Its mandatory components include depreciation deductions, payment for borrowed resources used by the lessor, lessor’s profit, compensation for insurance payments under the lease object insurance contract (if the asset is insured) and other expenses stipulated by the lease agreement.

At the stage of analyzing the financial efficiency of a leasing project, general methods for evaluating the effectiveness of investment projects are used, taking into account the characteristic features of leasing and the specifics of a particular project.

If you need help financing investment projects, please contact Viola funding Limited at any time.



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