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Margin for Working Capital

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(Querist)
26 October 2021 1. In cost of project what is margin for working capital ?
2. What is the means of finance for margin for working capital? Bank Finance or Borrower's margin?

Kindly guide?
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Aashok Kumar Sharma online

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Aashok Kumar Sharma online (Expert)
09 July 2024 In project finance, particularly in the context of infrastructure or large-scale projects, the margin for working capital refers to the portion of funds that the borrower (project entity) needs to contribute from its own sources towards the working capital requirements of the project. This margin is typically expressed as a percentage of the total working capital needs.

Here are the answers to your questions:

1. **Margin for Working Capital:**
- The margin for working capital is the amount or percentage that the borrower must contribute from its own funds towards meeting the working capital requirements of the project. It is a part of the total project cost and is not funded by the project finance lenders.
- For example, if a project requires $1,000,000 for working capital and the lender requires a 20% margin, the borrower needs to provide $200,000 (20% of $1,000,000) from its own sources.

2. **Means of Finance for Margin for Working Capital:**
- The means of financing the margin for working capital typically comes from the borrower's own resources. This can include:
- **Equity Contribution:** Funds contributed by the project sponsors or equity investors.
- **Internal Accruals:** Profits generated by the project or funds accumulated through operations.
- **Promoter's Contribution:** Personal funds of the promoters or shareholders.
- It is not financed through bank loans or external borrowings provided by project finance lenders. Lenders prefer to finance specific project costs and assets rather than working capital needs, which are considered operational expenses.

In summary, the margin for working capital is a part of the project cost that the borrower must fund from its own resources. It cannot be financed through additional bank finance or external borrowings arranged for the project. This structure helps ensure that the project entity has a financial stake and commitment to the project's operational success beyond what lenders provide.
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