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Understanding the Roles of Lenders and Investors in Project Financing

Lenders and investors play distinct roles in project financing. Lenders, often bankers, provide loans with a focus on repayment within a specific timeframe, avoiding project risks and not sharing in profits. In contrast, investors offer equity, expecting higher returns and benefiting from project profits while accepting greater risks. They aim for income generation, capital growth, market entry, or product sales. Both entities assess key factors such as the project team, solid fundamentals, and financial viability before committing resources, influencing overall economic growth.

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Understanding the Roles of Lenders and Investors in Project Financing

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  1. Lenders vs. Investors • Lenders: often bankers, make loans, do not want to bear risks, expect repayment over specific period of time, do not enjoy benefits of a project • Investors: provide equity to a project, expect a higher return than lenders, benefit from a project’s profits, take more risks - but not risk-takers, play a role in project management

  2. Why Do Investors Invest? • Produce income.In a particular pattern. • Achieve capital growth. With or without time constraints. • Enter a market. And thereby avoid start-up costs and market research. • Sell a product. Especially capital goods. • Form a partnership. And thereby grow quickly.

  3. Why Do Lenders Lend? • To build relationships with clients who will be a future source of business • Enter new business areas to expand portfolio profitability and find a competitive advantage • Contribute to economic and social growth thereby stimulating greater lending activity Note: that most banks separate project finance from corporate finance save time and learn the interests of banks in advance

  4. What Do Lenders and Investors Look for in Projects? • Strong entrepreneur and project team • Solid project fundamentals and plan • Risk assumption and mitigation • Clear legal and regulatory structure • Country stability • Financial viability • Exit mechanisms

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