The most common obstacle is finding the right financing to fit your business. Working a government-sponsored program like PACE or applying for a loan at the local bank can be exhausting and time-consuming and end up negatively affecting the business owner in the future. This is why so many installers are turning to brokers who are experienced with this particular equipment and know which banks are looking for which credit profiles. This saves you as a business owner the time and agony of going from bank to bank or the pitfalls of signing your life away with a 20-year lease.
Starting with the local bank route because that is generally the first route a business owner may go, the main issue is that it’s usually a waste of time because that’s not the type of lending local banks do. A bank’s primary focus is setting up instruments such as checking/savings accounts, mortgages, lines of credit, car loans, student accounts, and retirement accounts. Even if you have a great relationship with your banker, local bankers are generally unaware of the financial benefits of going solar and, more importantly, are uncomfortable with the collateral.
Keep in mind that bank loans are collateral-based. A mortgage is backed by a house or building and often requires money down to make the bank’s position even stronger. This means that if you default on a mortgage the bank takes your house or building and will usually recoup the remaining balance, so the bank is always secure. A line of credit or SBA loan is generally backed by a blanket UCC filing so that all your assets can and will be repossessed until the bank is whole in the event of a default. Again, the bank is in a positively secured position.
Solar financing does not work this way. There is no blanket lien or building lien and the only collateral is the actual solar equipment, which has no resale value in the event of default. The bank views this as an uncollateralized loan and, nine times out of 10, will either pass on the transaction or agree to do it with a lien on the building, provided they do not already have one. But because they don’t want to just say no, they will often drag you through the process only to turn it down after collecting various updated financial statements and pulling your credit. The financial statements, by the way, are an opportunity for them to check your status, see what other lenders you’re working with and basically keep tabs on you.
The solution to not going through this process is to work with an equipment finance company that specializes in solar. It’s important that they specialize in solar because there are many nuances to the industry. Your lender has to understand how to underwrite the transaction and deal with the installers, not just to get the financing done but also to minimize the risk of cashflow issues for the contractor during the installation process. Yet, at the same time, the customer must remain in a position of control to ensure the project is completed correctly and in a timely manner.
Equipment finance companies that specialize in solar financing (See our article about choosing the right Equipment Finance Company) will know in advance what banks are open to solar and what bank is the best fit for each project. Certain banks won’t do transactions under $1 million, some banks will do roof mounts but not carports, some have certain financial ratio requirements or time-in-business restrictions, or they won’t approve financing in various states. The list goes on. So rather than going from bank to bank attempting to find financing, customers can bypass that exhausting process.
The other most common obstacle is installers’ difficulty conveying the benefits of solar savings to the customer. Almost always, the monthly finance payment is going to be more than the utility savings and up to double the monthly utility savings. Obviously, the business owner is told that the lease will be paid off after seven years and it’s all profit after that, but still, it is hard to wrap the mind around spending seven years making a payment that’s more than the savings. Well, the important thing to understand is the 30% tax credit and the depreciation. This is why almost any CPA will recommend going solar for a profitable business, but it does require understanding how the cash flow truly works.
I’m going to throw some math at you breaking down the economics of a typical $200,000 solar installation financed over 84 months.
Hypothetically, the customer cuts $1,500/month off their electric bill and their payment is $2,900/month. That sounds high, and if we multiply out the difference over the seven-year term the customer is paying $117,000 more in monthly payments than they are saving in electricity.
However, if we add back the 30% tax credit, that’s $60,000 cashback (30% of $200,000). If we then add the depreciation, that’s another $70,000 back (35% of $200,000, representing a 35% corporate tax bracket). Then if we write off the interest, that’s another $15,000 back (35% of $43,000, which is the total interest over seven years.) So, the total outlay is $243,000 (sum of payments over 84 months), while the total income is $271,000 ($126,000 in utility bills + $60,000 in tax credit + $70,000 cash value in depreciation + $15,000 cash value in interest write-off). That is a gain of $28,000.
But that is just the cash flow and is only during the life of the term.
Most importantly, the business owner will A) have major utility savings for the next 13 to 18 years depending on warrantee (the average warranty is 20-25 years); B) significantly improve the value of their building; C) have positive marketing for social media releases or press releases; and D) be positively contributing to the environment. In addition, various states have incentives like SRECS (income returned to customer annually) or tax exemptions.
Considering the financial picture, solar financing makes sense for a business owner with tax liability but not as much for a business without tax liability. However, sometimes business owners better suited for a standard capital lease will apply for government-sponsored programs like PACE that are designed for low income-producing companies without tax appetite, as evidenced by no credit check and no income verification. These are good products for owners with marginal credit or companies that are not profitable. But, because the payment is similar to the savings, sometimes profitable companies fall for the trap of signing up for the wrong type of financing. The downside to a program like PACE is A) the rates are often higher; B) you’re just treading water for 20 years without ever monetizing a profit; and C) the lender puts a lien on the property that prevents you from selling or refinancing that property without paying off the loan. I always tell my customers how valuable that equity is. The equity in a building is like a bank for a business owner; they can always go to it when they want or need money. To lose that safety net or allow someone else to dictate your access to it can be catastrophic, and that’s why the government programs are not recommended for profitable businesses.
Last, it is crucial that your bank or finance company understands the construction side as well. The construction schedule, the installer’s relationship to the manufacturers, and the structure of the progress payments are key. In a sense, the business owner is not the only one borrowing money. The installer will need money to buy materials, pay employees, and continue construction until the project is finished. There are horror stories about contractors using funds from one project to pay suppliers from another. The next thing you know, the contractor is not finishing the work, the customer is making monthly payments while not receiving discounts on the electric bill, and a construction lien is being placed on the building. This is all avoidable if the lender knows how to correctly structure the construction payment schedule to assure security for the customer. This is why it’s vital for the finance company to specialize in solar and understand the process.
With all of this said, I have seen tremendous growth in solar over the past 10 years, and it’s a wonderful thing to see. The industry has matured so that business owners are now aware that solar is a solution, not a gimmick, and installers have a greater understanding of tax benefits and financing so they can accurately convey the process to business owners. More banks have entered the market, which boosts competition, which in turn creates more aggressive rates. I have seen some amazing projects, from huge student housing down in Austin TX to a multi-million-dollar solar glass installation in Somerset NJ, to a small $20,000 martial arts studio in Bakersfield CA. I am truly blessed to be a part of the solar revolution, and I hope to see it continue its momentum going forward.
Alan Johnson is a Senior Account Executive and Solar Specialist at Providence Capital Funding in Brea, CA.
He can be reached at (714) 985-6207 or emailed at Alan.Johnson@Providencecapitalfunding.com