Modeling and key parameters of an investment projects include the following:

• Defining quantitative and qualitative aspects throughout the project’s phases.
• Identifying relationships between prices, costs, and outcomes to increase profitability.
• Scrutinizing the effectiveness of the project and benchmarking results against similar initiatives and the broader context within the sector or host country.

Before commencing the actual assessment and Key parameters of an investment projects, it is necessary to gather all essential information, adopt specific assumptions, and describe detailed parameters expressed in economic values.

Key parameters of an investment projects serve as the foundational criteria for either endorsing or rejecting the evaluated project.

The breadth of information required for project preparation and evaluation spans diverse disciplines, prompting the need for specialized teams.

The list of project parameters that should be planned first includes the scale of investment, capital costs, operating costs, revenue plans, working capital requirements, etc. A special place in this regard is occupied by the choice of sources of project financing, a combination of which must be selected and configured so in a manner that best aligns with the strategic goals of the participants.

CP Finance UK Finance brings together a team of experienced specialists in the field of project financing, financial engineering and legal support for international business projects. We are ready to provide our clients with comprehensive professional support, from calculations, modeling, planning and legal advice to raising long-term capital in accordance with the customer’s needs.

Basics of project parameterization

The key to a properly conducted planning of the effectiveness of investment projects lies primarily in understanding the mechanisms behind economic outcomes.

Investment is a process with cause-and-effect relationships. Only by understanding parameters and their effects project team can build a model for economic outcome analysis. Given that the process of preparing and evaluating an investment project is complex and time-consuming, it is highly recommended to employ specific solutions that facilitate analyses based on data used in the project assessment.

One of the techniques applied involves organizing available information and grouping it into sets related to selected issues linked to each investment project (time, total costs, sales, and financing sources). The classical approach to the basic project parameters can be limited to time, cost, scope, and project quality. Sets of such information are then used to construct more precise investment programs, allowing for the streamlining of data collection processes or obtaining results that form the basis for investment decisions.

It is advisable to develop fundamental project elements, such as:

• Initial investment assumptions.
• Forecasting sales revenue.
• Planning investments in fixed assets.
• Planning operational costs.
• Net working capital demand plan.
• Financing sources program for investment outlays.
• Cash flow statement, profit and loss account, and balance sheet.

The preparation of plans is carried out separately for each period of the project’s operation (associated with the fiscal year), requiring meticulous precision from the project preparation team. It is essential to note that all mentioned elements should be developed with great care to serve as a reliable and robust source of data, enabling an assessment of the profitability of the project.

It is imperative that data sources ensure the credibility, timeliness, completeness, and relevance of the data used in the parameterization of the investment project. The process of collecting data necessary for the preparation and evaluation of the project should adhere to procedures already in place during the pre-investment phase of the investment process. This approach is crucial to mitigate the risk of capital misallocation resulting from a superficial handling of such data.

The importance of assumptions on key parameters of an investment projects in investment process

In deciding to initiate business activities within the pre-investment phase of the project, it is crucial to first establish the fundamental guidelines for the project, often referred to as initial investment assumptions.

This involves determining the basis on which computational processes will be easily conducted within the developed plans and models necessary for evaluating the profitability of the investment project, commonly specified as either constant or current prices.

The role of inflation in project planning

Economic and financial analyses are generally carried out in constant prices, which do not account for inflation occurring in the sector.

This is because inflation significantly impacts the changing value of money over time, distorting the course of economic processes when expressed numerically. Therefore, the reported increase in profit or sales by the business project in the current prices compared to the previous year may not necessarily indicate real growth.

An understanding of the profitability of an investment project is only achieved by supplementing the above data with the scale at which inflation occurred. Assessing the profitability of investment projects in constant prices is typically driven by the substantial challenges in predicting future inflation levels. Overestimating or underestimating estimated inflation by just one percentage point can result in a 5% error on an annual scale, significantly impacting the forecasts of the project over a 10-year planning horizon. Another factor that increases the risk of error in forecasting in current prices is the varying pace of price growth for different groups of goods and services.

The inflation complicates determining the change in input prices relative to the outcomes achieved. As a result, estimating the real magnitude of project-generated outcomes based on the incurred costs becomes flawed.

The use of constant prices eliminates the aforementioned risks since, by design, these prices are free from such complications and provide more transparent results.

It is also important to adjust the realistically obtained results during project implementation for specific price growth indicators for certain groups of goods and services and compare the values obtained in this way with the postulated values. This allows project team for drawing conclusions regarding the actual profitability of the intended investment. Regardless of the chosen pricing formula, consistency is crucial in forecasting and discounting cash flows.

Planning investment costs

The next element in planning and setting parameters of the project is primarily concerning expenses incurred on fixed assets necessary for the commencement of production and normal operation of the project. Investment costs encompass all kinds of expenses that need to be considered before starting the production of a specific product or service.

Generally, three groups are distinguished in the structure of investment costs:

• Investments in fixed assets.
• Pre-production capital costs.
• Working capital costs.

Financial literature clearly defines “investment costs”, indicating that they are expenses generating cash flows over a period longer than a year.

Two fundamental types of these investment costs can be distinguished based on the timing of their incurrence:

1. Initial costs on fixed assets (for example, buildings and equipment).
2. Ongoing costs on fixed assets of a replacement and supplementary nature.

Initial investment costs on fixed assets are defined as expenses incurred during the construction phase of the investment, i.e., carried out before the commencement of production and sales.

These costs are often associated with pre-production costs, such as raising capital or conducting analyses before starting the investment, as well as expenses for:

• Land purchase, preparation, and project development.
• Construction or purchase of buildings and solid structures.
• Acquisition of machinery, vehicles, and other fixed assets.
• Intangible and legal assets.

Ongoing investment costs are expenses that increase the company’s fixed assets and are incurred during the operational phase of the investment project to ensure its proper functioning. They relate to the same elements of assets mentioned in initial costs, with the exception of pre-production expenses. These can only be incurred during the construction phase of the project.

When incurring investment costs to create fixed assets, it is also essential to consider information on the depreciation level of various components, determine the applicable depreciation rates (excluding land), and establish the liquidation value. The liquidation value is the value of the portion of assets that can be recovered in the event of discontinuation of production activity. It is worth noting that this information will affect the amount of operating costs incurred in connection with the operation of the investment project.

Planning operational costs of industrial projects

An estimation of the total production costs associated with the investment becomes crucial for proper Key parameters of an investment projects

It is critically important to calculate production costs in the investment project as annual costs and, simultaneously, as costs per unit.

According to the methodology by UNIDO for the preparation and evaluation of key parameters of an investment projects, the plan of production costs should include all costs related to the specific project, incurred in each year of operation, as well as marketing costs if they have not been previously accounted for.

Generally, operational costs of industrial facility consist of four basic categories:

• Manufacturing costs (materials, production supplies, labor costs, workshops maintenance).
• General administrative costs (salaries, taxes, rents, insurance and office maintenance costs).
• Depreciation (for example, constituting an investment costs).
• Financial costs (including interest).

The sum of manufacturing costs and general administrative costs forms operational costs, which are directly related to the conducted production and sales activities. Incurred operational costs and their structure depend on factors such as the location of the enterprise, natural conditions of host country, type of activity, technology used in production, equipment, degree of utilization of production capacity, organization of the production process, prices of raw materials, materials, and energy, labor costs, and the scale of the facility.

This structure enables precise monitoring and management of costs in various areas, facilitating the identification of areas where optimizations can be implemented and allowing efficient management of financial resources for the investment project.

When determining the level of operating costs for full production capacity, it is essential to distinguish between variable and fixed components of these costs. Dividing costs into “variable” and “fixed” allows identifying the relationship between variable costs and the degree of utilization of the production capacity of the investment project. Variable costs include raw materials, direct labor costs, plant services and supplies. Fixed costs, primarily encompassing general production costs and long-term service costs, remain relatively constant regardless of the production level, although they may change in the case of long-term analysis.

When calculating the amount of production and marketing costs incurred in the investment project, it is necessary to classify them into direct and indirect costs. Direct costs are defined as costs that can be attributed to a production unit or service due to their direct connection. In contrast, indirect costs are considered expenses related to the production process but do not have a direct impact on the manufactured products or services.

This is because they cannot be directly assigned to products but only based on allocation keys.

Selecting sources of financing for an investment project

The availability of funds for the implementation of an investment project is a fundamental condition not only for making investment decisions but also for formulating the project itself or initiating pre-investment research and analysis.

Initially, it is crucial to determine the method of financing the expenditures in the fixed assets, and this should at least partially occur during the construction phase of the plan. The final selection of financing sources for investment expenditures should be prepared only after building the program for total investment costs and for working capital.

The financing of investment costs can involve the following sources:

1. Equity capital.
2. Debt capital.
3. Project’s funds.

Based on the source of origin, we distinguish between internal and external capital. Internal financing does not involve third parties and is based on the redistribution of net profit from the sale of products and services, depreciation, and asset sales. External financing relies on funds obtained from the environment and may result from the involvement of both equity and debt capital.

Equity capital consists of owner and partner contributions, as well as shareholder contributions or stock issuances.

This capital comes from additional issuances of own shares, grants, contributions, or subsidies. It forms a stable basis for financing the project, determining its financial liquidity, as it is provided for an indefinite period and does not have the nature of immediate demandability.

The capital requirements of investment projects often exceed the capabilities of the owners, forcing them to seek external sources of financing. Debt capital is mainly obtained from national or foreign commercial banks (investment loans, working capital loans) and financial institutions, constituting liabilities to these entities. It can also come from other sources of financing, such as credit or loans granted by third parties, leasing, bond or stock issuances.

Debt capital, along with the interest, is most often subject to repayment according to the terms and conditions specified in the loan agreement or other document governing the rules for its provision by the creditor.

In the case of loans, banks require collateral (bank guarantees, asset pledges), but they also allow for the replacement of repaid obligations with new loans.

It is important to remember that the use of external sources of funds, especially the conditions for obtaining them (amount, repayment terms, cost of servicing), can significantly impact the financial results achieved by the investment project. Therefore, before deciding on financing the investment project with debt capital, it is advisable to determine the possible sources, calculate the estimated amount of interest, and research the legal form of the credit security required by the bank (promissory note, government guarantee, endorsement, mortgage).

It is also worth noting that skillful use of external sources of project financing, while maintaining the proper capital structure, often results in increased profitability of equity, a phenomenon known as the financial leverage effect. The positive effect of the impact of debt capital on the amount of net profit generated is achieved on the assumption that the costs of obtaining debt in the form of interest paid will be lower than the profitability of total capital calculated as the ratio of earnings before interest and tax (EBIT) to total capital.

In other words, if the difference between the profitability of equity and total assets turns out to be positive, we talk about a positive financial leverage effect due to the project achieving additional benefits with less equity involvement.

In the case of a negative difference, the problem of project’s insolvency arises because the costs of interest are higher than the profitability of the assets.

Another important source of financing that occurs only in the operational phase of large investment projects is the so-called own funds, i.e., cash flows generated during the entire project’s lifecycle. These include profits not subject to distribution, depreciation, and accumulated earmarked reserves.

Therefore, in addition to finding capital, the choice of financing the implemented investment project itself is another critical element determining its business success.

The appropriate capital structure, setting optimal parameters of an investment project are particularly important issue, influenced by factors such as specific phase, organizational-legal form, economic conditions, or market environment. Financing is setting the key parameters of an investment projects and not only the accumulation of resources but also the management of these funds to maintain the balance and liquidity of the project.

Therefore, development and planning of financing sources should be preceded by thorough and comprehensive analyses that guarantee that the capital solutions adopted by investors will finance all investment costs and allow for the smooth implementation of the project.

CP Finance UK Finance is ready to provide you with comprehensive support when planning large investment projects, developing financial models, attracting long-term capital or bridge financing, project management, etc.

Contact us.

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In addition to working capital loans, which are used by many entrepreneurs, business investment loans are an important tool for financing companies.

However, the requirements and procedures for obtaining such a loan will differ.

From a financial point of view, an investment loan is one of the most attractive options for young companies.

History knows many companies that were able to expand their activities and acquire their current status largely thanks to the long-term financing received from the bank.

CP Finance UK FINANCE offers long-term financing of large projects with an initiator’s contribution of up to 10%.

We finance the following industries:

• Energy sector and renewable energy sources.
• Heavy industry and mechanical engineering.
• Chemical industry and processing of chemical waste.
• Infrastructure and transport, including seaports and terminals.
• Agriculture and food industry.
• Real estate and tourism.

The European financial services market offers a variety of solutions, such as investment loans for new companies.

Of course, in the case of newly established enterprises, the formal procedures and conditions of the loan may differ.

Contact the CP Finance UK FINANCE LIMITED team to learn more about our offerings.

Business investment loans: classification and types

A highly competitive environment requires companies to make quick decisions, which is why business lending is experiencing rapid growth.

Borrowed funds can be used by a business to pay for various operating expenses, investments in fixed assets, or the implementation of specific investment projects.

Differences between the listed types of loans may include, among other things, the maturity of the loan, the method of providing funds, the level of credit risk, the type of collateral used, as well as the procedure for evaluating the borrower’s creditworthiness.

What is a business investment loan?

A business investment loan is a bank loan for financing projects implemented by a borrower, the purpose of which is the construction, restoration and modernization of fixed assets.

Business investment loans are targeted financial products as well as the acquisition of intangible assets or long-term securities.

This means that an entrepreneur who receives an investment loan must use the money received in this way for the purposes agreed with the bank. This type of financing will always be directed to support a specific project.

The purposes for which an investment loan is taken for a period of up to 15 years or more must be clearly indicated by the entrepreneur when applying for a loan. You cannot first receive funds, and only then decide what exactly you will do with the money.

The condition for obtaining an investment loan for a business is a positive result of the financial analysis of the investment project carried out by the bank.

When providing investment loans, the bank often requires the initiator’s own contribution, which reduces the risk for the bank.

To finance large projects, banks sometimes offer syndicated loans.

The loan amount can be transferred to the borrowing company immediately or can be provided in tranches. In the latter case, the receipt of each subsequent tranche usually depends on the fulfillment of the borrower’s obligations under the previous phases.

Financing long-term investment projects

In many developing countries, long-term projects and business ideas are often funded with working capital.

A business investment loan is fundamentally different from working capital financing.

Working capital is short-term in nature.

On the other hand, investment projects for large businesses are usually planned for up to 15-20 years and involve huge investments.

We are talking about a completely different burden of servicing credit instruments.

Working capital financing is short-term and is aimed at covering current needs and payments. It can also be used for certain contracts in order to increase market share or increase a company’s turnover.

However, a working capital loan should not be used to finance investment projects as long-term business needs. For this purpose, there are investment loans with special conditions and long maturities. The logic of these financial instruments is significantly different.

An investment loan is used by a business mainly for the acquisition of fixed assets.

These are buildings, machinery or equipment that will increase the quantity and quality of the products and services offered. We can say that this is an investment.

Paying for raw materials to service the current contract is not an investment, so in this case the business must use working capital financing instruments.

An investment loan for a business can be supplemented or replaced by leasing. The idea is as follows: when we talk about buying machinery, equipment or other property with an investment loan, you will need additional collateral, different from the already acquired asset.

Practice shows that in most cases new companies cannot offer such collateral, and in this situation, one of the possible options is to use leasing to acquire the required asset. If you are going to buy expensive real estate or equipment, but the company cannot provide adequate collateral, you need to focus on leasing as the optimal tool. Business investment loan will require additional guarantees.

How to get a business investment loan?

Applying for a loan is the most difficult part of the whole process associated with obtaining a business investment loan.

Why?

In the case of large loans with a long maturity, banks always use advanced tools, including the so-called credit scoring.

Credit scoring in investment lending is a complex system of algorithms and financial indicators used to evaluate the borrower’s creditworthiness, as well as the risk of possible problems with debt repayment in the future.

An investment loan is always a business-specific tool. This means that a one-time check of the current financial health of the borrowing company and its financial history is not enough. Experts must carefully analyze the activities of the borrower in order to make the right decision.

Even the most attractive investment loan is always provided for a specific purpose.

Therefore, when applying for business investment loans, an entrepreneur will have to prepare the following documents:

• Detailed, professional and sound business plan.
• Reports confirming the financial health of the company.
• Documents from the national court register.
• Statutory documents, etc.

The above requirements will apply to any business investment loans.

Possible goals of an investment loan

Based on the definition, investment loans can be used to purchase so-called fixed assets, intangible assets, shares and securities.

A business investment loans   is used for the following:

• Equipment used to conduct business.
• Real estate and land owned by the borrowing company.
• Any other assets for the production of goods or the provision of services.

Intangible assets, in turn, represent all types of patents, licenses or copyrights.

Since these assets can be bought from the copyright holder, an investment loan can be used for this purpose.

How about securities?

Thanks to the loan, you can buy shares of other companies or bonds. It is important to note that some banks provide businesses with the opportunity to take out one investment loan instead of another loan.

The concept of “investment” can be interpreted in different ways, and you can name a number of possible investment items.

Does this mean that an investment loan can really be used for anything?

This is usually not the case.

The decision to issue a loan is always taken by the bank.

This implies the following:

• The company must convince the financial institution that the investment is profitable.
• Financing of specific projects will allow the company to develop.

It is important to understand that an investment loan is not a form of subsidy.

The bank will provide financing to your company only if it sees benefits for itself in the project.

Thus, the ideal financing scheme should include a high quality and promising business plan.

Finally, your company must demonstrate financial success by growing dynamically and consistently. So the bank guarantees timely debt repayment.

It is critically important to convince the bank that the costs you are planning are of an investment nature and, in addition, will bring significant benefits to the company and its partners.

As a rule, banks do not have a “catalog” of possible options for using a business investment loan. This can be a loan for the purchase of real estate, equipment and a number of other expenses. The main thing is that the bank analyst considers them to be a wise investment of funds.

Investment loan conditions and interest rates

An important condition: to obtain business investment loan, an initial contribution of the borrowing company is almost always required.

In this sense, an investment loan is similar to a mortgage loan, when the bank requires a part of the money in advance.

Some banks provide funds on simpler terms, but obtaining a business investment loan without an initial deposit is a difficult task. As a rule, business lending is associated with a very high risk for the bank. Taking even more risk by providing loans to an entrepreneur who cannot afford to pay 10-20% of the project cost is highly unlikely.

What is the interest rate and general financial conditions of an investment loan for a business?

In most cases, the cost of the loan will consist of the standard loan processing fee and interest.

It all depends on the conditions contained in a particular loan agreement.

Interest rates on business investment loans vary widely. It depends on the economy, the situation in the host country, the industry and the specific project.

In the current market conditions, the issuance of investment loans entails a greater risk for banks than before. This means that the bank can, for example, offer a lower interest rate, but this will shorten the loan maturity.

What to look for when choosing a business investment loan?

A loan is a debt that an entrepreneur will pay off for years.

For this reason, you should carefully study the terms of the loan. Apart from the interest rate (for example, EURIBOR and margin), experts highlight other elements that need to be checked.