Project finance

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Page written by Chris Godfrey. Last reviewed on July 8, 2025. Next review due April 6, 2026.

Funding major projects out of working capital or through traditional forms of business borrowing can place strain on any organisation’s cash flow or create risk that could harm the long-term health of the company. Project finance overcomes these hurdles by creating a self-contained, special purpose entity that can attract investment, manage project cash flow and better mitigate the risks.

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What is project finance?

Project finance is a popular method of funding for large-scale, long-term infrastructure, industrial, or public service projects. Widely used in the UK, this type of financing is structured so the project is ring-fenced within a separate legal entity known as a Special Purpose Vehicle (SPV) – this is a standalone company created specifically for the project, and which is responsible for raising the necessary capital as equity from investors or debt from lenders.

Using an SPV isolates the project’s assets, liabilities, and cash flows from those of the sponsor. This means that if the project fails, lenders can only recover from the project’s assets and revenues, not from the sponsors’ other resources.

Project finance is particularly common in sectors such as renewable energy, oil extraction and infrastructure, often via a Public-Private Partnership (PPP). Under this arrangement, private sector partners finance, design, build, and operate facilities for the public sector, which in turn pays a long-term fee to the private partner, enabling repayment of the debt used to fund the project.

How does project finance work?

Project finance is a structured, long-term financing solution for large-scale projects. Lenders rely primarily on the project’s own cash flows and assets for repayment, while the risks are shared among multiple stakeholders through carefully drafted contracts.

Key characteristics of project finance:

Limited or non-recourse financing: Lenders have claim only on the assets and cash flows of the project SPV, not on the broader assets of the project sponsors
Cash flow-based repayment: The main source of repayment is the cash flow generated by the project once operational. This makes the financial viability of the project critical to securing funding
Off-balance sheet treatment: For sponsors, project finance often allows the project’s liabilities to be kept off their main balance sheets, which can be beneficial for their financial statements and credit ratings
Risk allocation: Risks are carefully allocated among the various parties—sponsors, lenders, contractors, and sometimes government entities—through a suite of project contracts
Long-term: Projects are typically underpinned by long-term contracts (such as concession agreements, power purchase agreements, or offtake agreements) that provide predictable revenue streams
Government involvement (common in the UK): Many large projects require public-private involvement, where the public sector provides support or long-term commitments to purchase services
Project-specific financing: The financing is tailored to the specific needs, risks, and cash flow of the project, rather than the general credit of the sponsors

Who can benefit from project finance?

Project finance can support a wide range of developments, including:

Infrastructure and construction projects

Project finance is a key feature of UK infrastructure and construction projects. It can provide these developments with substantial funding without overburdening public or private balance sheets. Project finance allows risk sharing among stakeholders, can attract diverse investors, and ensure repayment from project cash flows. Additionally, long-term contracts can provide stable revenue, while efficient risk allocation and clear cash flow management can enhance project viability and deliver economic growth, jobs, and improved public services.

Renewable energy and utility projects

Project finance offers renewable energy and utility projects a robust framework for raising capital while minimising risks – an approach that can attract a diverse range of investors and lenders, including those seeking green and sustainable investment opportunities.

Project finance allows for the leveraging of government incentives and subsidies, reducing upfront costs and enhancing the economic viability of renewable installations. Additionally, it can support the UK’s transition to net zero by facilitating large-scale deployment of solar, wind, and other clean technologies. The end results can be environmentally beneficial—such as reducing carbon emissions, but also drive job creation, economic growth, and improved energy security. Ultimately, project finance can ensure that renewable energy and utility projects are financially sustainable and aligned with global and national climate goals.

Large-scale corporate developments

Large-scale corporate developments can derive significant advantages from project finance, primarily through risk reduction and enhanced financial flexibility. The limited-recourse structure of project finance supports investment in ambitious, capital-intensive projects by making them more manageable and less financially threatening to the corporate entity.

Project finance also enables access to a broader pool of capital and investors, including banks, private equity, and institutional funds, by leveraging the project’s own cash flows and assets rather than relying solely on the sponsor’s creditworthiness. Additionally, the efficient allocation of risks among stakeholders—such as lenders, contractors, and suppliers—further enhances project viability and can lead to higher returns for investors if the project succeeds.

What are the pros and cons of project finance?

Like all forms of business financing, project finance comes with advantages and disadvantages:

Pros

Risk mitigation and allocation: Project finance allows risks to be allocated to the parties best able to manage them, such as construction risk to contractors and operational risk to operators. This can reduce overall risk for sponsors, lenders and investors
Limited/non-recourse financing: Lenders have recourse only to the project’s assets and cash flows, not the broader assets of the sponsors. This protects the parent company from financial contamination if the project fails
Enhanced debt capacity: Sponsors can raise more debt than would be possible through conventional corporate borrowing, as financing is based on the project’s viability rather than the sponsor’s creditworthiness
Off-balance sheet treatment: Project liabilities are not consolidated on the sponsor’s main balance sheet, which can improve financial ratios and credit ratings
Access to diverse funding sources: Project finance can attract a broader range of investors, including banks, institutional funds, and private equity, who may be interested in the specific risk/return profile of the project
Confidentiality and competitive advantage: Information can be shared with a limited group of investors, helping maintain confidentiality and competitive advantage

Cons

Complexity and high transaction costs: Structuring a project finance deal is complex and often requires extensive negotiation of contracts, which can generate high legal and advisory fees
Higher cost of capital: The cost of capital is generally higher than for traditional corporate loans due to the perceived risks and the complexity of the arrangements
Lengthy and resource-intensive process: The process can be time-consuming, requiring significant due diligence, feasibility studies, and ongoing monitoring
Dependence on project cash flows: If the project’s cash flows do not materialise as expected, investors could face significant losses
Regulatory scrutiny: Project finance structures, especially those involving SPVs, attract regulatory and government attention, requiring strict compliance and transparency

Project finance vs. traditional business loans

Project finance and traditional business loans differ in structure, risk, and repayment methods.

Project finance is tailored for large-scale, capital-intensive projects—such as infrastructure, energy, or construction—where funding is secured primarily by the project’s assets and future cash flows. Repayment depends on the project’s success, and risk is shared among stakeholders, with lenders having limited or no recourse to the sponsor’s other assets. In contrast, traditional business loans are simpler, relying on the borrower’s overall creditworthiness and often requiring collateral to support the loan. Repayment is based on the business’s general revenues, not a specific project.

In summary, project finance is complex and suited for big, risky ventures, while traditional loans are better for established businesses seeking straightforward, flexible funding for smaller projects or ongoing operations.

Key stages of project finance

Project finance schemes are complex, multi-party endeavours. Getting these types of scheme through to a successful conclusion requires adherence to a structured plan:

Project planning and feasibility study

The initial stage of any project finance scheme involves identifying suitable projects and conducting comprehensive planning and feasibility assessments. Stakeholders define project objectives, scope, and deliverables, while technical, economic, and financial feasibility studies are performed to evaluate the project’s viability. This includes market analysis, environmental impact assessments, and preliminary cost estimates, ensuring the project is technically sound and commercially attractive before proceeding.

Risk assessment and mitigation

The second stage is risk assessment. This is a critical undertaking, where potential risks—including construction, operational, financial, and regulatory risks—are identified and analysed. Mitigation strategies are developed and allocated to the parties best suited to manage them, often through contractual agreements. This process ensures that risks are minimised and transparently shared among project participants, protecting all stakeholders from unexpected losses.

Securing funding and investment

During this stage, detailed financial models are created to forecast cash flows and returns. Sponsors and project managers negotiate with lenders and investors to secure the necessary debt and equity financing. Key legal documents—such as term sheets, loan agreements, and shareholder agreements—are drafted and finalised. The process culminates in the financial closing, where all funding is secured, contracts are signed, and funds are made available for project implementation.

Project execution and repayment

Once funding is secured, project execution can begin. This phase of the project will be closely monitored to ensure adherence to timelines and budgets. As the project becomes operational, ongoing monitoring and reporting ensure performance targets must be met. Cash flows generated by the project are used to service debt and provide returns to investors, continuing until the project’s obligations are fulfilled and all debt is repaid.

How to apply for project finance

Applying for project finance is different than applying for traditional business loans.

Firstly, you’ll need to prepare a detailed project proposal, including technical, financial, and commercial information, and conduct feasibility studies to demonstrate viability. Next, you should compile your business and financial documentation, such as financial statements, cash flow projections, and risk assessments. When your project is ready for submission, you’ll need to identify suitable lenders—banks, institutional investors, government agencies, etc. In many cases it may be best to engage brokers or consultants to assist you with this crucial task.

Once your formal application is submitted, lenders will conduct due diligence, including site visits and credit checks. If approved, negotiations will lead to final contracts and funding. Throughout, you must ensure compliance with regulatory and legal requirements, including registering the project company at Companies House if forming an SPV.

Where to get project finance:

You can search for project finance by approaching banks, commercial loan providers and public funders one by one. However, be aware that this process can be slow and complicated and could take weeks or months to complete. Alternatively, you could use the services of a finance marketplace. This type of online platform works with a large pool of financing sources and can immediately introduce you to a choice of funding from a range of lenders and investors. They may also be able to give you advice and help you with the application process. This can be especially useful for businesses that have never applied for project finance before.

Alternative financing options for large projects

Project finance isn’t the only way to fund major projects. Alternatives are available:

Private equity and venture capital

Venture capital (VC) and private equity refer to funding that’s provided by investors in exchange for shares in the company. Venture capital is typically used by startups and fast-growing businesses to get a business off the ground or drive rapid expansion, whereas private equity tends to invest in more mature, established businesses. However, both options can also be used to fund a major project.

Unlike traditional financing, VC and private equity both rely on the future potential of the business or project to support the funding, instead of relying on hard assets such as property and equipment or personal guarantees. This can make this type of funding a good option for project financing or when avenues to more traditional sources of funds are closed. However, while this type of financing can provide substantial funds and strategic support, it also means giving up some ownership and control to investors who typically expect high returns and want a say in key decisions.

Public-Private Partnerships (PPPs)

Public-Private Partnerships (PPPs) are collaborative agreements between government bodies and private businesses to finance, build, and operate infrastructure or public services. In a PPP, the private sector typically invests capital, assumes project risks, and handles construction or operation, while the public sector provides oversight and long-term payments or user-based revenues. In the UK, the public aspect of PPP typically comes from central or regional government departments, such as the National Infrastructure and Service Transformation Authority.

Infrastructure bonds and institutional funding

Infrastructure bonds are long-term debt securities issued by government bodies, public-private partnerships, or corporations to raise capital specifically for infrastructure projects, such as roads, railways, energy facilities, and hospitals. These bonds offer fixed or inflation-linked returns over a set period, appealing to investors seeking stable, long-term income.

Institutional funding refers to investments made by large entities such as pension funds, insurance companies, and sovereign wealth funds. In the UK, these institutions typically seek predictable, long-duration assets that match their long-term liabilities, which makes infrastructure an ideal investment class.

Get started with Swoop’s business funding platform

Working with business finance experts can make all the difference when applying for funding. Contact Swoop to discuss your financial needs, get help with your application and to compare high-quality project finance deals from a choice of lenders and investors. Get that major project started without any hassle. Register with Swoop today.

Written by

Chris Godfrey

Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Barclays Bank, Metro Bank, Wells Fargo, ABN Amro, Quidco, Legal and General, Inshur Zego, AIG, Met Life, State Farm, Direct Line, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of consumer and business finance and insurance.

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