Project financing depends on cash flows of the business. Depending on the size of the project, owners may feel the need to borrow money for expansion or to start out fresh. As a traditional practice, sponsors or the project owner visit their local bank or financial institutions to take out a loan. In this article, we will discuss when a project will be considered as limited or non recourse financing.
To know whether a project financed by these lenders as limited or non recourse, you have to know what are the assets a lender can claim against if the borrower failed to repay the loan amount.
Non-recourse project financing
In non-recourse project financing, there is no recourse to the project sponsor’s assets for the debts and liabilities of the project.
This means, financing is done purely on the viability and anticipated cash flows of the project rather than the credit worthiness of the sponsor.
Even the project sponsor is not legally liable or under obligation to repay the debt.
In case of default, after selling all the business assets, if still a balance due, then lender has to take the loss. Lender has no claim on sponsor’s other funds.
How much security is necessary to support financing depends on the feasibility, support required from sponsors and the complexity of the project. If project involves high risk and involvement of sponsors, then it may require additional capital from the sponsors.
Limited recourse project financing
As the name suggests, in limited recourse project financing, responsibilities and obligations of the sponsors is limited. Depending on the type of contract sponsors signed, if the money is still owed on the debt after selling all the business assets, then the lender can go after the borrower’s other assets for non payment of loan.
Limited recourse financing gives the lender a higher degree of security. Due to this reason, it will always favor the lender. Whereas, borrower will always be interested to go for non recourse.