Introduction

Project finance involves creating a stand-alone vehicle—often an SPV—whose assets and revenues secure the debt and equity used to build and operate a project. Searches for “ project finance process ” or “ how to finance a project step by step ” frequently seek clarity on the lifecycle. This guide breaks down the five core stages: project preparation, term sheet negotiation, due diligence, documentation and legal contracting, and financial close.

1. Project Preparation & Feasibility

• Market study and demand analysis: Assess long-term off-take agreements, price assumptions and competitive landscape.
• Technical feasibility: Engage an Independent Engineer to review site conditions, technology selection and construction timelines.
• Preliminary financial model: Build a dynamic model forecasting capital expenditure (CAPEX), operating expenses (OPEX), revenue streams and target returns (e.g., project finance IRR 10–15% ).
• Risk mapping: Identify construction, market, currency and regulatory risks, and propose mitigation measures—an essential foundation for project finance risk allocation.

Results feed directly into the initial project financing structure, defining debt capacity, equity requirements (often 10–20%) and security arrangements.

2. Term Sheet & Indicative Structuring

Once feasibility is confirmed, lenders issue an indicative term sheet that outlines proposed financing terms. Typical elements include:

• Debt-to-equity ratio: Sponsors commit equity—commonly ≥10%—with balance funded by non-recourse debt.
• Key covenant metrics: Debt Service Coverage Ratio (DSCR), Loan Life Coverage Ratio (LLCR), minimum cash reserves.
• Pricing: Margin over base rate (e.g., SOFR + 250–350bps).
• Security package: Pledges of project contracts, accounts, shares of the SPV and step-in rights.

The term sheet serves as the blueprint for detailed due diligence and legal documentation.

3. Due Diligence

• Technical due diligence: Independent Engineer certifies design, construction budgets and contractor credentials.
• Financial due diligence: Auditors validate the financial model, cost estimates and sensitivity analyses under base, upside and downside scenarios.
• Legal due diligence: Counsel reviews project agreements—EPC, O&M, off-take or PPA (for renewable energy finance ), land rights and permits—to ensure enforceability and alignment with PPP financing principles.

Each dimension must meet the standards of all financing parties, from commercial banks to multilateral agencies.

4. Documentation & Contracting

• Finance documents: Loan Agreement, Security Documents, Intercreditor Agreement.
• SPV incorporation & governance: Establish the project company’s charter, board structure and trustee arrangements.
• Construction contracts: EPC Lump-sum Turnkey agreements with fixed-price and performance guarantees.
• Off-take agreements: Long-term purchase contracts or Power Purchase Agreements ensuring predictable revenues.
• Insurance policies: Cover construction risks, business interruption and third-party liabilities.

Precise drafting ensures compliance with non-recourse or limited-recourse structures and aligns stakeholder incentives.

5. Financial Close

• Drawdown mechanics: Issuance of drawdown notices to the facility agent, triggering tranche releases.
• Security perfection: Filing of security interests, share pledges and endorsements of contracts.
• Cash flow waterfall: Defined payment sequence—construction costs, debt service, O&M reserves, sponsor distributions.
• Compliance checks: Final review of compliance certificates, insurer confirmations and escrow arrangements.

With funds disbursed into the SPV, construction or operations can commence under the agreed timeline.

Final Thoughts

The project finance process is a rigorous journey that demands technical, financial and legal precision at every phase. From initial feasibility through term sheet negotiation, due diligence and contracting to financial close, adhering to a structured workflow ensures your project is bankable and well-positioned for success. Engaging experienced advisors early can streamline approval and reduce execution risk, helping sponsors secure infrastructure funding, renewable energy finance and mining project funding on optimal terms.