What Are the Different Types of Project Finance Risks?

Accurately assessing project finance risks is an important component of any project management process. The idea is to identify various elements or factors that could conceivably affect the outcome of the project based on the financial resources dedicated to that project. The actual array of project finance risks associated with any given project will vary, based on the nature and complexity of that project.

One key example of project finance risks has to do with the potential for success carried by that project. As part of the assessment, it is important to develop a timeline for how long outside funding will be needed to sustain the project, at what point the project will begin to generate some sort of revenue that helps to offset the costs, and ultimately when the project will begin to generate a profit that can be used to not only cover ongoing expenses but also replace those resources consumed up to that point in time. Having this type of timeline in place makes it easier to measure progress and identify any other factors that may be threatening to derail the project or at least slow that progress.

The general project financing structure may include resources drawn from several different avenues, with some project finance risks associated with each one. For example, some of the funding may come from equity investors, a syndicate of virtual capitalists, or even bank finance loans or lines of credit established especially for the execution of a project. With each one, there is some potential risk in terms of the project failing to generate funds that can be used to repay those loans or investments within the projected period of time. In order to keep the risk under control, it is often helpful to establish some sort of backup funding that can be called upon to settle debt that is coming due, effectively buying more time for the project to become self-sustaining.

Possible mechanical or technological issues are another example of project finance risks that could not only delay or derail the project, but could exert a negative influence on the cash flow that is used to fund the project. Here the focus is usually on minimizing the risk by monitoring any equipment that is used to manage tasks relevant to the project, and making sure none of the steps or action items associated with the effort are hampered by equipment failures. Just as preparing backup sources of funding helps to prevent the project from running out of money, creating a backup plan to account for delays due to equipment malfunctions or technological failures is also a great way to protect the project and reduce the potential for failure.

Project finance risks can include other elements that have the potential to slow or undermine a project, such as the loss of key personnel involved with the effort, changes in consumer demand that render the project useless, and even unanticipated issues such as shifts in the general economy, political upsets, or some sort of catastrophic natural disaster that renders key facilities unusable for a period of time. Depending on the nature of the project itself, some project finance risks will be readily identifiable and somewhat easy to mitigate, while others may carry a much lower potential. In any event, identifying the risks and coming up with escalation plans to address those risks when and if they occur will go a long way toward enhancing the chances of success.