Solar installers, EPCs and project developers had just started breathing sighs of relief because they had finally helped institutional banks, like Wells Fargo, Merrill Lynch and Citibank, understand solar industry economics.
But while utility-scale projects are finding it easier to get funding, there’s still a lack of it in the small-commercial and residential segments. Community and regional banks could hold the keys to increasing access to capital for those projects, but installers are wary: How will the industry explain solar economics to a whole new group of bankers, many of whom have never seen a solar array?
“Many financial institutions, banks and credit unions alike, have been late to the game as it pertains to solar installation financing because they didn’t realize what a tremendous opportunity it was,” says Scott Pellegrini, area VP of consumer lending for Provident Credit Union. “Our solar portfolio has performed exceptionally well.”
According to the bankers, the four key ingredients to finding local solar financing are:
- Good project cash flow projections
- Excellent installer credit
- Excellent installer reputation
- A long-term relationship with the lending institution
Jeff Cowherd, senior VP for First Green Bank in Florida, says cash flow is the most important criterion local banks will examine.
“Demonstrate to the banker that the borrower will have an improved cash-flow because of the energy savings the solar array will provide for them,” Cowherd says. “These savings can often be used to help service the subject debt.”
It’s not only about cash flow, however. Scott Hawkins, CFO at Technology Credit Corp., says banks lend based on customer credit, not on the quality of the project or its cash flows. “The project is only collateral to the lending arrangement and will not overcome weak customer credit,” he says.
For Provident, Pellegrini says they have specific criteria on which the credit union decides which projects are worthy of funding.
“The borrower must have good credit (more than 700 FICO) and a debt to income ratio of 35% or less,” Pellegrini says. “The property must be owner-occupied within our geographic footprint. There are other factors, too, but those are the first two we study.”
The credit union also examines the background of the installer, Pelligrini adds. In particular, Provident prefers its installers to have an excellent rating with the Better Business Bureau, and membership in a California solar energy industry association is preferred.
Cowherd concurs. “Our bank likes to see our borrowers use a contractor who is a member of our state’s Solar Energy Industries Association chapter,” he says. “This gives the banker some comfort as to the ability of the contractor to perform the work properly.”
If the installer is not a member of a recognized association, the banker will want three references from those who have done business with the contractor so the bank can get some comfort with the contractor that way, he adds.
Hawkins says banks are also looking for long-term customers. Installers who ask for loans for one-off projects will be seen as less reliable than those with multi-project portfolios.
“Banks want customer relationships with multiple lending/fee generation opportunities,” he says. “Therefore, they want to finance solar projects to existing customers or to new customers within their geographical footprint, where the solar financing will lead to other business.”
Common Objections
Cowherd says the most common objection from other banks is they don’t have an appropriate long-term financing product that solar installations need. Instead, they look at solar installations as an equipment loan, the terms of which most often range from 5 to 7 years.
“You don’t get 20-year amortization or term with equipment, which is why First Green Bank came up with its solar-specific loan program,” he adds.
Typically, local banks will require financial packages from borrowers including current owners’ financial statements, three years of tax returns for both the installer and the business, and current interim financials for the business.
Hawkins says small commercial projects, to a large degree, are seen by banks as the worst of both worlds. Commercial projects often don’t have the proper size to attract institutional investors, but can’t scale easily in the aggregate like residential programs.
“The ‘take it or leave it’ contract approach of the residential market does not work in the small commercial market because most customers will leave it,” he says. “Banks are typically not staffed to put this much time and effort into executing individual transactions of this size. As a result, most of these transactions are financed through brokers who do all the heavy lifting, which slows the approval process considerably.”