What Is the Difference between Corporate Finance and Project Finance?
There is a degree of risk associated with both corporate finance and project finance. Those risk factors can be higher in project finance because this form of financing relies on revenues that have not yet been generated for the repayment of debt. Corporate finance also introduces an element of risk. The key difference is that the merits of project finance are based on a project's potential, and in corporate finance, capital might be extended based on the credit quality and profitability of a business.
Another difference between corporate finance and project finance surrounds the frequency in which companies turn to either option. This decision might be based largely on regional preferences driven by laws and the economic environment that is most prevalent in a nation. Factors such as whether an economy is developed or emerging might similarly drive a decision about which type of financing is most efficient and practical. Research has indicated that project finance is more common outside the United States than in the U.S.
Corporate finance and project finance also differ in the functions that each activity performs. A company that might be undergoing a restructuring in which the business entity needs to be divided and certain divisions might need to be sold would turn to corporate financing to accomplish these goals. Debt or equity can be raised and sold to public investors, for instance, which in turn provides the business with access to capital for operations. Similarly, a company that might need to reorganize following a bankruptcy filing could use corporate finance to gain access to capital or reorganize debt. Corporate executives also use this type of financing to add value for shareholders by improving operations and ultimately generating greater profits.
In project finance, there also is financing activity, but it is tied to the creation of some large project. Financing involves mostly debt — often high amounts of it — but some equity might be used as well. The repayment of any loans derives from the future cash flow that is expected to be generated from the new project. Loans extended in project finance are often non-recourse and subsequently are typically secured with some collateral that must be tied to the new project. In corporate finance, the cash flow generated from operations in addition to assets might serve as collateral to creditors.
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