i am your guide to solar finance for business

Energy savings and resource efficiency

Business

Loan

A loan you take out to buy the solar system may be unsecured or secured against the solar system or another asset such as property. The cost of finance depends on the loan amount, the loan term, loan security and your business’s credit profile. The interest rate is usually variable, but you may have the option to fix the rate for all or part of the term.

Also known as: commercial loan, business loan

Below are two possible illustrations of how the cash flows and benefits of a loan could work under a realistic, but hypothetical scenario. One is for a secured loan (against residential property) and the other is for an unsecured loan with a correspondingly higher interest rate.

Scenario - secured loan

Solar project

Solar system size

30kW

System cost

$46,285

Replacement inverter cost (Assume a new inverter is needed after 15 years.)

$9,355

Cost of daytime grid electricity

$0.21 to $0.28 / kWh

Capacity charge

$0.34 / kW / day

Finance conditions

Proportion financed

100%

Term

5 years

Interest rate

8%

Residual payment

0%

The chart below illustrates the annual cash flow outcomes based on this scenario.

Secured loan option: cashflow analysis for an example 30kW solar PV system

This finance option benefits from a much lower interest rate than any others because it is secured against residential property. This means it has the second best Net Present Value after self-funding. The downside, not captured in this business case, is that the loan is against a residence which could restrict the ability to raise other funds against the property or to sell the property.

This option has low net cash flow requirements, around $2,000 per year over years 1 to 5, and then rapidly increases in value to a final Net Present Value of $62,000.  In year 15, the inverter needs replacing and cash flow dips slightly. The Internal Rate of Return for this option is very high at 42%.

 

 

 

Scenario - unsecured loan

Solar project

Solar system size

30kW

System cost

$46,285

Replacement inverter cost (assume new inverter is required after 15 years)

$9,355

Cost of daytime grid electricity

$0.21 to $0.28 / kWh

Capacity charge

$0.34 / kW / day

Finance conditions

Proportion financed

100%

Term

5 years

Interest rate

12.5%

Residual payment

0%

The chart below illustrates the annual cash flow outcomes based on this scenario.

Unsecured loan: cashflow analysis of an example 30kW solar PV system

Although this scenario is called an unsecured loan, it may be secured against the solar system. However, the interest rate will be more dependent on your business credit rating than whether it is secured against the asset, so it is called `unsecured’ to distinguish it from the loan secured against residential property in the first example.

In this chart you can see:

  • The upfront costs are all borne in years 1 to 5. These are offset in part by bill savings resulting in net negative cash flow, due the short finance period.
  • For the remaining 20 years the solar system delivers positive cash flow outcomes through bill savings and Net Present Value grows quickly.
  • The exception is year 15, when this scenario assumes the inverter needs replacing and cash flow dips slightly.
  • Overall Net Present Value is around $55,000 with a simple payback of 7 years.

 

Finance details

Period

Principal

Interest Rate

1–5  years

$1k to $500k

5 to 16%

Fees, charges and other payments

Loans usually involve

  • an establishment fee
  • monthly service fees
  • exit fees

You may be able to choose an interest only loan and pay the full principal at the end of the loan. 

You pay for maintenance of the solar system throughout its life. 

Accounting and tax

You own the solar system. The asset and liability appear on your balance sheet. 

You may make tax deductions for

  • fees
  • interest payments
  • depreciation of the asset

There are no tax deductions  for repayments of the principal. 

Advantages

  • Zero or reduced upfront cost, freeing up cash for other business investments.
  • You can reduce the interest rate by securing the loan against other assets, such as property. A loan secured against the solar system itself will be priced similarly to unsecured finance, due to its poor resale value.
  • Once the loan is repaid you continue to save on power bills for the life of the system.
  • If the interest rate is fixed, then it is simple to budget for repayments.
  • If the interest rate is variable, you will get the benefit of any decrease in interest rates.
  • If you repay ahead of schedule, you may be able to draw down that extra amount if you need it for other business expenses. 

 

Disadvantages

  • It will affect your ability to borrow for other business activities.
  • Securing the loan against another asset, such as a property, will affect your ability to sell that asset.
  • You are responsible for the ongoing maintenance and operation of your system.
  • If the interest rate is variable, you may find it difficult to meet repayments if they increase. 

Risks

  • Energy bill savings may be less than the loan repayments, so you may not see net benefits until after the loan is repaid.
  • Fees and charges will vary between financiers, so make sure you understand them all.

 

 

 

The performance of any solar PV finance option is highly dependent on how you and your financier structure the agreement. This includes the amount financed, the term of the agreement, the interest rate charged, fees and charges and any balloon payments or residuals.

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Page last updated: 10 December 2015