Not sure if you qualify for financing for your solar project? In this article, we go over what financiers look at when a business applies for financing. Here are some important factors financiers consider when evaluating commercial solar projects.
When evaluating financing, the first thing lenders consider is the offtaker’s credit. With terms often extending up to 15-25 years, lenders want assurance that the business will still be in good financial standing throughout the term.
For large corporations and public entities that are considered investment grade, credit is known to be strong and financing is significantly easier to secure and on better terms.
However, most small and medium-sized businesses and non-profits are not considered investment grade, making financing options more sparse and expensive, leaving these entities often underserved.
Some of the factors that determine the credit of a business are the history of the business, current debt obligations, debt payment history, and the level and stability of profitability over time.
Debt Service Coverage Ratio (DSCR)
Another factor lenders take a look at is the Debt Service Coverage Ratio, or DSCR. The DSCR refers to how much cash flow is available to service the debt payments in the given quarter or year.
A DSCR of 1 means that all available cash flow is being used to make debt payments, which severely stifles the business’s ability to grow. This is very risky for the lender. The lowest DSCR lenders typically consider is 1.2 and to be on the safe side, lenders often prefer a DSCR of 1.4 or greater.
Intuitively, it is very risky for lenders when the solar project results in the business losing money. The more savings from solar, the more the business will be able to repay the loan. There are many factors that dictate these savings such as the current utility rate, installation cost, system quality, available incentives, and net energy metering policies.
Type of Business
The type of business impacts the risk profile of financing a solar project. Some industries are riskier and less stable than others. For instance, hospitality properties (hotels and motels) are considered riskier since leases are not involved and performance is highly correlated with the business cycle.
In addition, financiers are often reluctant or unwilling to provide financing to gas stations because they face significant environmental risks relative to other types of businesses.
Financiers are also reluctant to lend to non-profits. Non-profits by their very nature may have less capacity to repay the financing and tend to have worse financial metrics such as the DSCR.
Not only that, but lenders face greater headline risk or negative news coverage in the event that the non-profit defaults on the loan.
Take for example a secured loan on a local church where the property serves as collateral. If the church defaults and the lender moves to recover its losses by repossessing the property, there may be a backlash in the local community and negative press that may reduce the lender’s future revenue.
Luckily, BlueFlame is much more flexible than traditional finance companies. In fact, we offer financing to a wide range of commercial customers including hotels, gas stations, and non-profits. If you are interested in speaking with us about solar financing, please schedule a free appointment here.