Implement Projects as External Ventures?
More and more companies are
turning to project financing through spinouts. In this arrangement, loan
repayments are based on profits realized from the project.
The main reasons for financing and
implementing projects as external ventures are:
insufficient collateral to
secure a bank loan for implementing a large project internally
the need to
loose controls and organizational burden and
empower management of the project dealing with development of an
innovative product or service.
For some large projects, if they
were financed in the conventional way, based on the creditworthiness of a
company, its liabilities would increase and undercut its financial standing,
possibly leading to a lower credit rating for the company. Project financing
skirts there drawbacks by linking creditworthiness to a project's long term
Spinout Projects May Look More Attractive to Financing Institutions?
If a project was financed in a
conventional way, the performance of the company's various divisions would
have an impact on its ability to make repayments. Project financing - which
limits lending and risk only to profitable businesses – offers an attractive
source of earnings. What's more, banks can share risk raise the necessary
funds by putting together contracts involving a consortium of financial
External Projects as a Part of the Corporate Venture Strategy
In external ventures, large and
midsized companies can discover a source of growth. New product or service
development projects established as independent ventures can more readily
fulfill their potential. These
would enjoy a higher flexibility, provide independence and space for action
and allow management to enhance market capitalization. They can also be
established as joint
ventures to share risks and rewards with partners that have