To capitalize your PV system investment, you are going to borrow money from someone. Even if you pay cash, you are borrowing money from yourself—money that if invested elsewhere could generate some rate of return. Whether it makes the best sense for you to borrow money—from yourself or from another source—depends upon several factors. The first is whether you have the money to lend yourself. The second is whether another source will lend you money. If they do, what is their interest rate? How does this rate compare to your other investments? For example, say you can borrow money at 5% and are making 4% on your investments. At first blush, using your own money might seem the best plan. However, do you have excess investment capital to loan to yourself for this project? More importantly, don’t forget taxes, or legitimate deductions that reduce taxes. Your tax advisor should be able to give you advice on what will best serve your financial situation.
Vendor financing is often available from loan institutions that partner with your installer. You should also check with your local banks to see if they offer “green” or “energy” loans for renewable energy projects. If you have good credit, these loans can be unsecured. Credit unions may offer more competitive rates than banks.
If you have enough equity in your home, consider taking out a second mortgage. Finance institutions, likely including the one that services your first mortgage, offer either a home equity loan (HEL), usually for a specific improvement or purchase, or a home equity line of credit (HELOC), which is usually for larger expenses, like college tuition or medical bills.
Government-backed loans, which have some of the lowest interest rates, may be available if you live in the right area. They usually have a lower interest rate than you can get elsewhere. For example, if you live in Mississippi, you may be able to get a seven-year loan with an interest rate that’s 3% below the prime rate. At this writing, the prime rate was 3.25%—that means you could borrow money for seven years at 0.25% interest.
Another option might be peer-to-peer lending, an alternative to traditional bank financing. There are online websites that connect borrowers and lenders (in this case, microinvestors). The borrower makes the pitch and the seller decides to fund it—or not. This is often used in cases where traditional credit is not available.
The options available to you may not be available to others, and vice-versa. Find out what is available to you and then compare the options. This should all be part of your business plan.
While purchasing a PV system can be the most straightforward option, it may not be the most beneficial in maximizing your return on investment. Leasing programs may make the most of your money instead.
According to the U.S. Environmental Protection Agency, a solar power purchase agreement (SPPA) is a financial arrangement in which a third-party developer owns, operates, and maintains a PV system, but you site the system on your property and purchase its electrical output from the developer for a predetermined period. The benefit? You receive stable, and often less expensive electricity, as well as hold on to your money, while the investor reaps the financial benefit of tax credits and income generated from the sale of electricity to the host customer. SPPAs are best for people who don’t have the money or don’t want to use their own money to invest in a PV system and/or don’t have the tax liability to absorb available tax credits.
With a solar lease, someone else owns the PV system on your roof and you lease it, keeping the electricity to use or sell. A solar lease differs from a solar power purchase agreement (PPA) in that you are leasing the equipment, whereas with a PPA, you’re simply paying for the energy the equipment produces.