Depending on the scope of the project being financed, funding can be provided by a single entity or by a series of different investors as the project develops. Generally speaking, smaller projects are more commonly funded by single entities from beginning to end while larger projects tend to be funded by different groups of investors/lenders as the financial risk evolves along the project's timeline. These risks can be divided into two categories; credit risk and equity risk (also known as venture capital risk).

At the outset of a project, the primary risk for the project's investors/lenders is equity risk, which can be defined as the potential for the value of the investment to depreciate over time. Equity risk investors typically take on the greatest risks in order to receive higher rewards on the successful completion of a specific phase of a project or the completion of the project in its entirety.

As a project progresses from startup through its early phases, equity will start building and the risk profile for investors will start to migrate from equity to credit risk. Credit risk is defined as the potential for losses involving the payment of principle and/or interest on the project. The increasing equity in the project can then be used as collateral for lenders to mitigate their equity risk and protect their investment should a default occur.

Because the size of investment rounds in a project typically grows in size as the development scales up, funds for later rounds are generally provided by lenders such as banks and other financial institutions, which very averse to equity risk. This aversion is primarily due to the fact that lenders and financial institutions are typically leveraged at a ratio of approximately 9 to 1. Leverage at this level precludes these institutions from taking on the potential losses involved in equity/venture capital investments due to the fact that any kind of material equity loss can endanger their reserve requirements as well as their ability to function as an ongoing concern.

It is critical then, for companies seeking project financing to map out a timeline that defines the migration from equity risk to credit risk. This type of timeline can assist investors/lenders to assess their risks and ensure that funds are being sought from investors who match the risk profile of the project. For more information on successful project financing, visit the Solvo Group team led by Dmitrij Harder at: http://solvogroupinc.com/