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Along with bank investment loans, the capital of investment funds plays an important role in business development around the world.
In developed countries, the largest sources of long-term financing include the following:
• Pension funds that form their capital from citizens, enterprises and the state.
• Insurance companies where significant funds are accumulated through insurance programs.
• Mutual funds provide capital to finance long-term investment projects in various industries.
Banks as sources of financing investment projects are becoming increasingly important, mainly we are talking about various forms of investment banking.
It involves the direct participation of banks in business in order to receive not only interest, but part of the profits from the project.
Sedona Investments, a company with international financial experience, offers long-term financing for major projects around the world.
We help finance the construction of power plants seaports, LNG terminals, oil pipelines, real estate, roads and other facilities.
Investment loans: advantages of banks for project financing
A bank investment loan is an external source of financing for investment activities, which is provided on the terms of repayment, security and targeted use of funds.A bank investment loan is one of the ways to finance long-term projects for the acquisition (construction) of fixed assets, modernization or reconstruction of technological lines, and the creation of new production facilities.
The project for which an investment loan is requested may not have sufficient financial attractiveness (funded facilities may not generate income at all or affect it indirectly), or the financial flows within the project may not be sufficient to service the investment loan. Unlike project finance, where the repayment of the loan is carried out using the cash flows generated by the project, the source of repayment for an investment loan is the entire commercial activity of the borrower's company.
Table: Key features of a bank investment loan
| Features | Brief description |
| Lender | The creditor of the investment project may be a commercial bank or a consortium of banks (in the case of the implementation of large projects). |
| Special purpose | Financing activities for the acquisition, construction and modernization of fixed assets, including industrial facilities, power plants and infrastructure. |
| Maturity | An investment loan is a long-term borrowing and largely depends on the payback period of the investment. It is possible to take a grace period. |
| Scale | Investment loans, as a rule, are issued for the implementation of very large projects. For example, Sedona Investments offers its clients long-term project financing of £50 million GBP or more. |
| Collateral | Loans are usually secured by liquid assets of various types, which may include project property, land plots, and intangible assets. |
| Risk | A long term financing increases the risk for lenders due to possible adverse changes in interest rates, the state of the economy and market fluctuations. However, adequate collateral can significantly reduce risk. |
| Forms | In addition to the usual forms of lending (one-time loan, credit line), leasing, mortgage, project financing can be used. |
| Interest rate | In investment lending, both fixed and floating interest rates can be used (the latter is used much more often). |
To better understand the concept of "investment loan", it is necessary to outline its functions for an investment project.
These functions are described in detail below:
• Intermediary function, consisting in the transformation of bank financial resources into an investment resource. This function reflects the main purpose of investment lending through banks. Commercial banks use credit resources, which are formed using the funds of depositors (deposits), as well as borrowed funds, including those borrowed from the country's central bank. These funds, after being transferred to the borrowing company, become a source of financing for investment activities.
• Investment financing, which consists in financing the investment activities of borrowers. By issuing an investment loan, commercial banks carry out targeted financing of certain projects. This allows companies to continue developing their business without accumulating significant internal resources, leading to a sharp acceleration in the investment process and economic growth in general.
• Control function, which refers to the control over the effectiveness and intended use of borrowed funds. From the moment of issuing an investment loan to the full repayment of the debt and payment of interest, the bank carries out comprehensive monitoring of the borrower's activities. This significantly increases the efficiency of investments.
Thus, based on the functions performed, experts identify the main tasks facing bank investment lending.
From an economic point of view, these tasks are as follows:
1. Mobilization of funds of legal entities and individuals on a long-term basis.
2. Financing the activities of borrowers on the basis of repayment and targeted use.
3. Improving the efficiency of investment projects.
The stages of investment lending are a complex well-coordinated mechanism, which is carried out by the efforts of a huge team of experts. Their activity consists not only in providing a loan, but also in protecting the bank from various risks arising from this type of lending.
The stages of issuing an investment loan by commercial banks are given below:
1. At the first stage of bank investment lending, the bank gets acquainted with the borrower using the business plan of the investment project and other documents, assesses its financial health, as well as the risk associated with financing a particular project.
2. At the second stage, a loan agreement is drawn up and signed by the bank and the borrower. The structure and content of this document should correspond to the interests of the parties, which lays the foundation for the success of the investment project.
3. At the third stage, a comprehensive monitoring of the borrowing company and its activities is carried out, which contributes to the targeted use of borrowed funds.
High-quality documents, combined with a competent policy of the bank and the use of appropriate control procedures, determine the effectiveness of investment lending and the fate of projects.
For each investment loan, its maximum amount is set depending on the financial needs of the project and the borrower's ability to repay the loan and interest. This limit is determined based on the cost of the investment project, available collateral and other financial resources of the borrower, as well as on the basis of the loan guarantees provided.
It should be noted that commercial banks prefer to finance projects in which the contribution of the initiators would be at least 20-30%.
The role of investment funds in project financing
An investment fund is a financial institution that manages the money of investors or depositors.According to the ownership, investment funds are classified into state, municipal and private funds. The main task of the investment fund is to pool the money of investors and manage these funds in such a way that the profit from investments exceeds the inflation rate or the potential profitability of the deposit. Investors' assets are managed either by the fund's staff, or by third-party specialists.
The evolution of collective investment is closely related to the development of the stock market.
It is believed that the first fund was founded by the monks of the Order of St. Francis, who, during the tonsure, gave all their property to a single fund.
However, the first European investment fund was created in Belgium in 1822 by King Willem I of the Netherlands in order to invest in foreign countries using credit instruments.
However, a real surge in the popularity of investment funds took place in the United States and Great Britain after the end of World War II. Currently, about 100 million Americans own shares in various investment funds.
The investment fund performs a number of specific functions:
• Reducing the costs of transactions in the securities market.
• Accumulation of funds of numerous investors in the pool.
• Investing in various financial instruments to diversify risks.
• Ensuring effective asset management.
The activities of investment funds are regulated by national law.
Any fund must pass a rigorous audit and obtain a license from the local stock market regulator that controls the activities of such institutions. Without an appropriate license, the investment fund does not have the right to carry out activities.
The legislation regarding investment funds varies significantly depending on the country, so the level of reliability of these institutions and the rules for cooperation also vary.
Table: The role of investment funds in the modern economy.
| Features | Brief Description |
| Effective investment management | Investment funds help to effectively manage financial reserves, increase the profitability of free money stored in accounts. For example, large public funds of oil-exporting countries can invest funds received from the sale of hydrocarbons in strategic assets and important national projects. |
| Viable alternative to bank deposits | Investment funds attract the savings of individuals and companies to increase profits, being a good alternative to bank deposits, which often have rates below the rate of inflation. |
| Economic regulation | Investment funds ensure the flow of funds from stagnant and unpromising sectors of the economy to more attractive industries. |
| Investment in development | The money managed by the investment fund can be invested not only in stocks, gold or bonds, but also in high-tech venture sectors of the economy, promising start-ups. |
| Increasing investment attractiveness | The presence of developed investment funds helps to stabilize the country's financial system and increase its investment attractiveness. Most of the most famous investment funds are registered in the USA, Japan and Switzerland. |
Of particular note is the so-called venture capital, which refers to investment funds created to co-finance projects based on an innovative idea, suffering from a lack of capital for its implementation.
A fund usually consists of tens or hundreds of investors who invest their money in an enterprise that can bring high returns in the near future. In exchange for financing a risky project, owners give the fund a large share of the stock. If the project succeeds and the value of the company increases significantly, the fund will most likely sell its shares to another investor.
The undoubted advantages of investment funds are the following:
• Investment activity is carried out regardless of the stage at which the company or project is located, which opens up wide opportunities for financing business at different stages.
• Long-term business support, unlike a bank, because investment funds pay attention not only to the present (assets), but look to the future (forecasted financial flows).
• No need for collateral as investors accept it in exchange for a higher risk premium.
• Improving the company's image by attracting investment funds in the future provides more opportunities for obtaining loans.
• Providing the company with know-how in finance, marketing and business contacts.
On the other hand, these funds also have disadvantages, listed below:
• Relatively high cost of obtaining funds.
• Restriction of freedom of action of companies.
• Increasing the number of liabilities to capital providers.
• The need to prepare reports and analyzes.
• Distribution of future profits with the fund.
The main difference between funding through investment funds and bank loans is that funds are more willing to finance start-ups.
Banks, on the other hand, are reluctant to provide investment loans to young projects. In addition, private equity funds finance risky projects without the need to apply for collateral.
In the case of bank loans, the higher the risk, the higher the required collateral. The overall cost of financing investment projects, which is lower than in the case of funds, speaks in favor of banks. These differences are shown in the table below.
Table: Differences between project financing through investment funds and bank loans.
| Criteria | Investment Funds | Bank loans |
| Age of companies | New companies / businesses existing on the market for a short time | Companies that have been on the market for several years |
| Risk | High risk and there is usually no need for collateral | High risk, usually there is a need for security |
| Participation of the capital provider in the project structure | High | Low |
| Profit distribution | Need to share profit with investors | Profit accumulates in the company |
Private capital is an alternative source of capital acquisition by enterprises.
However, it does not compete with an investment loan due to the different life stages of the financed projects. A change in the interest of companies in investment funds always affects the demand for bank loans.
If you need a large investment loan for a capital-intensive project, contact Sedona Investments.
Our company offers long-term financing to companies in heavy industry, chemical industry, energy sector, mining and processing of minerals, residential and commercial real estate, infrastructure and transport.
