Last month, Boulder, Colo.-based financial technology company Wunder Capital launched its third financing product for commercial solar PV projects, Wunder Term Loans. These new Term Loans are designed for businesses looking for an accelerated path to ownership of their commercial solar project. Wunder focuses on the traditionally underserved small commercial market, providing businesses and EPC/developer partners with development and term financing for projects valued at up to $1 million.
Here is the original news story on these Term Loans. We followed up with the big brains at Wunder Capital to get more details into this particular segment and just how this new financing product can help.
What hurdles are there for financing solar in the small commercial market?
Wunder Capital: How long do you have? The first hurdle doesn’t have anything to do with solar but is simply that the cost of capital for private companies is generally very high. When making a loan to an individual, lenders have long relied on FICO scores and when making loans to large corporations, they have similar rating mechanisms like S&P and Moody’s. This allows them to make fast decisions in an algorithmic way. But credit ratings for private companies, especially smaller ones, are inconsistent and widely varied. This results in commercial lenders being very conservative. They typically have an application process with data requirements that are onerous for the borrower and expensive for the lender to review. Once processed, those lenders will most often look for their loans to be backed by assets with significant proven value (like real estate), or for a borrower to leverage their own home with a personal guarantee.
Unfortunately, solar as an asset class is still new and most lenders do not feel comfortable with it yet. So, even though a commercial customer is investing in an asset that will save their business money and produce valuable electricity for at least 25 years, they cannot use the system as collateral for the loan, as is typical when buying other valuable assets like real estate and equipment. The lender will instead look for an all-assets lien, a lien on the building, or even a personal guarantee from the business owner. Many businesses already have all-assets liens because of general business loans they may have taken out or from inventory suppliers they work with. Those who don’t may want to keep that option open for the future.
There are also a series of other hurdles faced by different segments. The split incentive problem between tenants and owners is often cited; lack of tax appetite is sometimes an issue, especially for non-profits; and for installers looking to move into the space from residential, the sales cycle can be surprisingly long. But from what I’ve seen across more than 20 states, the non-standard credit ratings and unproven solar asset value are the two biggest challenges.
Your new Term Loans are collateralized with the solar project itself. Can you explain a bit more about what this means for the stakeholders involved?
Wunder Capital: Absolutely. So, like I mentioned before, all-assets liens are a common way for commercial loans to be secured. It basically means that the lender gets everything that the business owns if they were to default on their loan. For smaller businesses taking out larger loans, the business itself often doesn’t have enough assets to cover the loan amount, so lenders will require a personal guarantee as well. This is essentially the business owner putting their name on the loan and agreeing that all of their personal assets are also on the line. Additionally, signing a personal guarantee or allowing for an all-assets lien could be limiting your borrowing options in the future.
At Wunder, we feel more comfortable than other lenders with the asset value of solar systems so we issue loans that are backed by the system itself. Because we focus only on solar financing for a specific profile, we are very confident in the recoverable value of each of the solar assets that we are investing in.
What are some specific markets or project sizes that fit the sweet spot for this product?
Wunder Capital: Our loans are eligible in all 50 states and can be used on projects up to 1 MW, though we mostly focus on the sub 500 kW space because these are the most underserved U.S. businesses right now. The big barrier in a lot of regions is the utility rate structure. We look at the project economics very closely to confirm the business is actually going to be realizing financial benefits from their investment within a short timeframe, and so we can determine the value of the collateral we’re lending against.
What does your ideal borrowing business look like?
Wunder Capital: Our Term Loan is a 7-year product, so it’s really designed for businesses that are more focused on the lifetime ROI of the system than on monthly cashflows. People tend to focus more on rate than on loan term, but really, the term has a much bigger effect on how much you end up paying in interest on an amortized loan. Total interest paid over the life of one of our Term Loans is about the same as you would pay on 3 percent capital with a 20-year term. So, we’re looking for businesses that understand these trade-offs and can afford to make slightly higher monthly payments for a shorter amount of time in order to get to virtually free power sooner. Our borrowers are often established businesses with strong financials and savvy leadership that are thinking critically about how to maximize their investment in solar.
Click 2 for more, with questions pertaining to solar+storage and an example of this program in action
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