Components make up at least a third, sometimes half, of the total cost of a solar project. Often, solar contractors are asked to pay for the panels, inverters and other equipment before a job is inspected and functional. But because homeowners aren’t usually expected to pay for a system until it’s proving to offset their energy costs, this heavy upfront component cost can stall or even sink contractors trying to increase business.
“Solar contractors growing their businesses often find themselves stretched for working capital, even as they reinvest their profits into their growth—hiring, marketing, trucks, etc.,” said Jonathan Doochin, CEO of national solar distributor Soligent. “By nature, a contractor’s growing business requires more working capital to cover operating costs to achieve larger revenues. Inevitably, there becomes a constant struggle of cash-flow management between balancing contract terms with customers, establishing credit lines for equipment and meeting finance payment milestones—not to mention timing when they pay their sales teams.”
Increasing demand for solar theoretically sounds good for business, but this growth can also complicate cash flow. Nestor Tarango, director of sales at New Mexico solar distributor Affordable Solar, illustrated this difficulty. A contractor selling and installing 10 systems per month will need about $70,000 in cash reserves to cover equipment procured prior to customers paying in full. A line of credit can help lower the total reserved cash needed. However, if sales jump a month—say from a successful marketing campaign—doubling their installations, their reserves and credit capacity must also double to purchase equipment for the extra jobs. This doesn’t even include overhead costs such as labor and administration expenses.
“In this new, fast-paced industry, this sort of growth is not uncommon,” Tarango explained. “It is exciting for a contractor to see an incredible jump in sales, but it can be nearly impossible to manage from a cash flow perspective. This challenge is compounded for new contractors who don’t have the business history to justify a trade line of credit or vendor relationships.”
The cash flow conundrum has moved distributors like Affordable Solar and Soligent to develop financing and credit solutions for their customers.
In addition to an equipment credit, Soligent’s Solar Engine program enables smaller contractors to offer financing options which may be more difficult to obtain from banks. “Financing has historically given the upper hand to the larger solar installers who can interface directly with banks,” Doochin explained. “Through our Solar Engine program, we are giving access to affordable and simple finance products—residential and commercial loans and PPAs— to local- and state-level installers, allowing them to compete on a level playing field. A good financing product unlocks new customers who wouldn’t otherwise be able to afford the system and provides working capital for installers to grow their businesses. Between the equipment credit and the working capital and consulting support through Solar Engine, we’re enabling our customers to grow as quickly as they can sell.”
Affordable Solar also offers loans, leases and PPAs to help contractors offer solutions to more customers. The distributor’s “direct-pay” program helps contractors with cash flow. Financers pay Affordable Solar directly for equipment. “This gives our company security in the deal and allows our customers an extended line of credit,” Tarango said. “Direct-pay programs have allowed several of our customers to grow from installing 15 to more than 120 systems per month, without having to raise outside capital. Direct-pay offerings give more solar contractors the competitive advantage of access to affordable financing options, and credit limits that fuel growth.”