What you Need to Know About Conventional Financing for Energy Projects

Today, so many companies are using more creative financing methods to make the changes in their company they want to see, whether that be for buying inventory, R&D, building redevelopment, property investments, or special projects, such as energy projects.

Energy projects specifically can be very rewarding and provide a quick ROI, but some companies don’t have the capital required to do a straight cash deal. This is where conventional financing can help.

What is Conventional Financing?

A basic definition of conventional financing is what you’d think of when a business goes to get a loan. There are several types of conventional financing methods/vehicles you can use to finance your organization’s next big venture.

1. Corporate loans

Corporate loans are a type of loan you’d get if you’re a public company. When you hear about corporate bonds or the bond market, they’re talking about companies issuing bonds like AAA bonds to publicly traded instruments. With these loans debt is sold off, but lending at the smaller level isn’t sold off.

2. Small business loans

Small business loans are loans you get if you want to start your business. You don’t have collateral to secure the loan against. Terms for these loans will typically range from being 1-10 years. Within this, there’s nonrecourse and recourse loans. Nonrecourse loans generally don’t happen because down payments are required, and most people launching small businesses don’t have the ability to make a substantial down payment; recourse loans don’t have this requirement, so they’re more common. Also, within this are personal guarantee loans, which can either be secured or unsecured. Unsecured loans are most common.

3. Small commercial real estate lending

Small commercial real estate lending doesn’t get as big as corporate loans, but it is larger than small business loans. There’s a lot of variability to tailor these debt instruments to the type of project. This is typically what professionals in the financing industry are referring to when they discuss conventional financing.

Conventional financing can be obtained through big or local banks, and it can be done by banks who provide it and ones that don’t. Interest terms can be secured/nonrecourse, or they can be a recourse loan with a personal guarantee, depending on the customer’s comfortability with those options.

Conventional financing can come with terms to maturity of 20 years, or sometimes longer (ex: terms could be matched to a business mortgage for 30 years). There’s a little more risk with this type of financing for banks, so the terms are typically more than, for example, mortgage loans. Most banks will add a risk premium to make terms around 4-5%, but that can be variable for different customers.

Each of these financing methods could be used to undergo an energy project, although it is least likely that a small business loan would be used for this purpose. Here are some other important details that are worth noting if your company is looking to finance an energy project:

The Underwriting Process for Conventional Financing

The underwriting process for these is similar and typical to what you’d see for other business lending (ex: for commercial mortgages or any other business loan). The documents needed or the articles of incorporation, profit and loss statements, ownership structure, balance sheets, cash flow statements, etc. are all needed. Generally, this process is very straightforward.

Down Payments for Loans

A lot of people think they need to have pay 20% down with these types of loans, but that’s not really the case. If you have strong cash flows and a building that has a good value, you don’t have to put any money down. Commercial real estate lenders are different than PACE (which would normally just give zero money down based on the value of the energy project); banks don’t know how to evaluate energy projects, so they will underwrite based on the facts they can see and the building value.

They would ultimately rather see if the company won’t go bankrupt; the safer the bank feels, the lower their rates will be and the more likely it is that you could avoid a down payment. It’s more about the value of the equity in the business than their overall health. The overall assumption that a down payment is needed to start an energy project can be the case, but it isn’t always required.

If You Have a Mortgage on the Property and You Want to Use a Different Bank

You could do a recourse and personal guarantee loan. In the event that you go default, you would sell the building to pay off the mortgage, but then you’d also have to pay the second bank with whom you took out the recourse loan.

Do you Have to go with a Certain Bank for Conventional Financing?

If your bank is better, EnergyLink can use your bank’s terms to finance an energy project. If you don’t have a mortgage, you could just go through a bank as normal. Or, you could just go through a second bank for the loan.

The biggest thing to remember is that there is so much flexibility with financing energy projects. If you can dream it, it’s likely that it can be done. And ultimately, loans are one financial tool to get energy projects done. Click here to see more financing options.

Interested in starting an energy project?

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