Online Lending, the Solution to Solar Financing
Online Financing and the Solar Industry
Funding is one of the most important questions when considering purchasing and installing a solar installation. This question is the reason that online lending is rapidly becoming one of the most powerful drivers of the expansion of the solar industry. While the residential solar market has grown fairly rapidly as homeowners receive loans or set up leasing, the commercial and industrial markets have remained stagnant, struggling to gain traction with both investors and potential clients.
Since the commercial and industrial sectors have much more available space for solar installations, the funding required often represents a sizable investment in solar energy. Without a favorable lending environment for solar loans, businesses have run into issues attempting to get the capital for these large investments. The solar market is also fairly new in comparison to older industries, which increases the risk perceived by loan providers.
The Issue with Traditional Bank Lending
Traditional banks are not yet comfortable with providing capital for the solar market, especially in commercial and industrial settings. One issue with providing loans to these two settings is that there is much less standardization in terms of the size and technology of the solar installations, which can make transactions more complex and therefore difficult for bankers with little technical sophistication. A second is the relative difficulty of determining the credit worthiness of a business to receive a loan for an investment that can spread over ten or more years. Agencies such as Moody’s or Dun & Bradstreet provide information that may provide some insight about the company’s current ability to pay off debts, but that may not reflect its long term viability.
Combined together, these factors make it a difficult for banks to comfortably assess risk when deciding whether to provide a loan. As time goes on, banks will surely become more comfortable with the idea of such loans, but at the moment the industry is considered too unknown to be worth the risk.
Solar energy is a relatively new technology, and with new technology can sometimes come unforeseen risks such as regulation. For traditional banks these risks can be significant, especially because they are often not specialized in the area. Thankfully, new lending companies have begun to emerge to help to fill the gap in funding, which allows businesses to attract the necessary capital to push the solar industry forward.
Open Energy and Online Loans
One solution is online lending, which can fully leverage the power of technology and the internet to streamline the process of applying for and receiving a loan. Its ability to simplify and cut costs in such transactions has expanded the possible avenues for solar energy funding, primarily by revealing new and profitable opportunities for investors to contribute to the solar markets.
Open Energy is one company pioneering the availability of capital for potential clients interested in installing solar panels. The company focuses specifically on the commercial and industrial solar energy markets.
According to Open Energy Founder and CEO Graham Smith, “In residential, most houses are of a similar size, and the solar plant is a particular size, typically 5-10 kw. That makes it easy, because if you’re installing thousands and thousands of a very similar size, it just makes the logistics of the whole operation more similar”.
That is not the case with the commercial and industrial markets, which include schools, hospitals, nonprofits and other facilities such as carports, all of which typically have massive amounts of space for the installation of solar panels.
Open Energy uses an online application system to allow clients to get loans of up to $10,000,000 for solar energy projects, cutting down transaction costs by standardizing and automating the loan process as much as possible. Mr. Smith states that “We’re making the financing more widespread and making it much more cost-effective so that borrowers can afford to take the loan”. This emphasizes the necessity that loans must not only be available, they must be available at an affordable rate. Open Energy provides an initial construction loan for the building and setup of the solar energy system, followed by a longer term loan. The loan is then paid back through the electricity savings accumulated through the solar system’s energy production during the years after its installation.
Open Energy Investors
The funding for the loans provided by Open Energy comes from investors attracted to the many positive qualities associated with commercial solar energy loans. Open Energy provides non-recourse, secured loans which allow them to claim the solar installation as collateral in the event of loan default, which reduces risk for investors.
Typical returns on the solar loans are between five and seven percent, which makes them a fairly high quality asset when considering the lower risk that comes with the reliability of typical solar installations.
Solar installations can last up to forty years with minimal maintenance, which suggests reliable cash flows for investors for a reasonable period of time. Nonresidential solar loans are also largely unaffected by fluctuations in the oil markets or the market in general as measured by the S&P 500. Lastly, the benefit of providing loans to the commercial and industrial sectors means that the loans are being paid by creditworthy, established companies, which further lowers the risk of default.
Overall, Open Energy’s approach to online lending centers on encouraging investment by minimizing risk and streamlining the process of loan approval. Channeling investor capital into the solar energy market is essential to growing the solar industry as a whole, and instilling greater investor confidence and interest is one of Open Energy’s key means to achieving that end. As Graham Smith puts it, “The measure of success is seeing how much institutions acknowledge and participate in what we’re doing”.
The Solar Industry Going Forward
The solar industry as a whole is growing, but certain sectors still require extra financial support to maintain pace with the rest of the industry, and online lending has established itself as one of the key solutions to this problem.
Unlocking these massive, untapped sectors of the solar market will be essential to increasing demand for solar installations. Consequently, much of the solar energy market’s growth going forward will be driven by investment and the availability of capital for potential solar clients. Developing a consistent lending structure for investors to come to will lead the way towards bringing in the billions of dollars of capital needed, and online lending is one step towards that goal. Ultimately, online lending is one important piece in the puzzle of factors that will allow solar to mature into a greater role in the future of our energy industry.