We develop a theory to trace out the solvent degrees of freedom from the grand partition function of colloid-solvent mixtures. Our approach to coarse-graining is based on density functional formalism of density profile and the grand thermodynamic potential of solvent. The solvent-induced interaction which is many-body in character is expressed in terms of two functionals; one that couples the solvent to the colloidal density distribution and the second represents the density–density correlation function of the solvent. The nature, strength, and range of the potential depend on these functionals and therefore on the thermodynamic state of the solvent. The solvent-induced contribution to free energy functional is also derived. A self-consistent procedure is developed to calculate the effective potential between colloidal particles, colloid-solvent, and colloid-colloid correlation functions. The theory is used to investigate both additive and nonadditive binary hard-sphere mixtures. Results are reported for the two systems for several values of packing fractions ηb and ηs and particles diameter ratio q=σsσb where symbols b and s refer to colloid and solvent, respectively. Several interesting features are found: The short-range attractive part of the potential shows non-monotonic dependence on ηb; when ηb is increased from zero, initially the potential becomes more attractive but beyond a certain value of ηb that depends on q, the attraction starts weakening. The repulsive peaks formed at R∼(1+12nq) where R is a distance between centers of colloidal particles expressed in units of σb and n is an integer, become stronger on increasing ηb. These results show that many-body contribution to the effective potential depends in a subtle way on packing fractions ηb,ηs, size ratio q, and on nature of the interaction model and makes a non-negligible contribution to the coarse-grained Hamiltonian.