C&I and Community Solar Financing

Financing for C&I and Community Solar Projects: Differences in Loan Offerings

Developers seeking financing for commercial and industrial (C&I) and community solar projects often have a range of options available, including loans from private lenders and traditional banks. While both private lenders and traditional banks offer a variety of funding solutions, there are key differences in terms of loan terms, requirements, and structures that developers should consider when evaluating their financing options.

Below I've outlined some the distinctions in loan products offered by private lenders and banks regarding debt service coverage ratio (DSCR), loan amortization, principal and interest reserves, and loan term.

1. Debt Service Coverage Ratio (DSCR): Private lenders typically require a higher DSCR compared to traditional banks. The reason for this is varied (risk, cost of capital, etc). The DSCR ratio measures the project's ability to generate sufficient cash flow to cover debt service obligations. Private lenders often seek a DSCR of 1.35 to 1.65 or higher to mitigate risk and cover private lenders' higher cost of capital. Traditional Banks may accept a lower DSCR compared to lenders, making financing more accessible for developers. A DSCR of 1.25 to 1.50 may suffice fortraditional bank loans, although specific requirements vary based on the bank's risk tolerance and lending policies.
2. Amortization Period: Private lenders typically offer shorter amortization periods, such as 12 to 20 years, for C&I and community solar project financing. Shorter amortization periods result in higher monthly payments, but can lead to lower overall interest costs over the life of the loan. Traditional Banks often provide longer amortization periods, such as 20-25 years, allowing developers to spread out payments over a more extended period, thereby reducing monthly payment obligations. Longer amortization periods can improve cash flow and project economics, particularly for community solar projects or C&I projects with long-term PPA and revenue streams.
3. Principal and Interest Reserves: Traditional Banks may require developers to establish principal and interest reserves as a safeguard against potential cash flow disruptions. These reserves, typically equivalent to six months of debt service payments, serve as a buffer to ensure timely loan payments in case of unforeseen circumstances.Banks: Banks may require a higher level of principal and interest reserves, often 12 months or more, to mitigate risk and enhance loan security. Greater reserves provide added protection for lenders and increase the likelihood of loan approval.
4. Term of the Loan:Lenders: Lenders may offer shorter loan terms, such as five or six years, for C&I and community solar projects. Shorter terms provide flexibility for developers and allow for quicker repayment, but may result in higher monthly payments.Banks: Banks typically offer longer loan terms, such as 10 years, providing developers with more extended repayment periods and greater predictability in cash flow. Longer terms can be advantageous for projects with slower revenue ramp-up or longer payback periods.

In summary, while both lenders and banks offer financing options for C&I and community solar projects, developers must carefully consider the differences in terms of DSCR requirements, loan amortization, reserves, and loan term durations. Lenders often impose stricter criteria and shorter terms but may provide more tailored solutions for specific project needs. In contrast, banks may offer more flexible terms and longer repayment periods, albeit with potentially higher reserve requirements. By understanding these distinctions, developers can make informed decisions and choose the financing option that best aligns with their project objectives and financial capabilities.