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May 8, 2015 | Four Common Credit Challenges with Commercial Financing
So you’ve decided it’s time for your company to jump on the solar energy bandwagon and take advantage of the many savings, benefits, and incentives available for commercial solar projects. Like most businesses, you will probably want to finance your project but may be wary of approaching lending institutions because of less-than-stellar credit. That’s a realistic concern — even in today’s more liberal lending environment, financial institutions are reluctant to fund a project for a company with a tarnished credit record.
How can you secure financing despite a difficult credit history? Here are four tips that can help:
- FOCUS ON YOUR CASH FLOW — Lenders look first and foremost for positive cash flow. If you can demonstrate that your cash flow is sufficiently healthy to enable you to repay the loan throughout its term, lenders may be willing to give a green light to financing your project. Provide a detailed income/expense analysis — quarterly, if possible — that shows a steady positive ratio between income and outgo and the steps you took to make that happen and maintain it down the road.
- DEMONSTRATE YOUR SUCCESS IN REPAIRING YOUR CREDIT — Like many companies, yours may have suffered during the Great Recession, resulting in a big dip in your credit rating. But if over the past several years you’ve made diligent and regular efforts to pay your bills on time, pay down loan balances, and use existing credit prudently, that positive track record in reestablishing your company’s credit can swing a lender’s decision in your favor.
- PRESENT A DETAILED BUSINESS PLAN — If you don’t already have a business plan for your company, at least for the next five years or for the length of the proposed loan, make the time to sit down and develop a thorough and realistic forecast of where you see your business going and how you plan to get there. At a minimum, the business plan should detail your short- and long-term business goals; financial projections for income, expenses, and profits, and how you expect to achieve them; a demonstration of your success in the past and how you will build on those successes going forward; and other information that demonstrates your company’s stability and staying power. If you already have a business plan, give it a thorough review and update where necessary — and don’t forget to factor in the expected financial benefits of going solar.
- EXPLORE ALTERNATIVE FINANCING OPTIONS — Don’t despair if conventional bank loans seem out of reach. Solar projects have the great advantage of access to a wide variety of financing approaches that offer benefits traditional lenders cannot. Today, nearly half of all nonresidential solar installations are financed through third-party ownership, such as leases or power purchase agreements (PPAs). Leases can be structured with no up-front expenses or maintenance costs – your only responsibility is to make the monthly payment. PPAs let you lock in energy rates for up to 20 years, so you see an increase in savings over time. In addition, the fixed energy prices secured through PPAs are significantly lower than market prices for conventional power. There is also no upfront cost or maintenance responsibility.
Bad or damaged credit needn’t put the kibosh on your company’s solar energy aspirations. With hard work, due diligence, and a willingness to consider nonconventional financing approaches, your company can reap the many economic and environmental benefits of solar power.