Project finance is the long-term funding of projects based on the cash flows of the project rather than relying on the balance sheet of the sponsor. Loans are most commonly non-recourse which are secured against the project’s assets and serviced entirely from the project cash flow rather than from the balance sheet of the sponsor.

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This emphasises the importance of financial modelling and the focus on the debt service capability of the project as measured by one of several debt ratios, the most common of which are the debt service coverage ratio  and the EBITDA interest cover.

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Project finance disciplines embrace some or all of debt service reserve accounts, cash sweeps, dividend restrictions and the need to observe or exceed certain debt ratios.