Financing for Commercial Solar: Pros and Cons to 4 Common Options
Commercial solar has become a popular option as businesses increasingly prioritize sustainability and look for ways to reduce their carbon footprint. However, finding the right funding option for a commercial solar system can seem daunting with the numerous choices available. Fortunately, businesses can consider several financing models to make their clean energy goals a reality. By creatively combining state and federal tax incentives, grants, and innovative financing models, commercial solar customers can realize an immediate and positive impact on their bottom line.
The four most common commercial solar financing options are cash and loans, leases, and PPAs. These different financing options have advantages and disadvantages; some offer better tax incentives for a slightly larger upfront investment, while others minimize upfront costs in exchange for reduced tax benefits. Whichever way you go, adding solar is one of only a few investments that start putting money back into your business's bottom line from the moment it's turned on.
More and more companies are investing in solar energy every year, proving that this form of clean and renewable energy isn't just an environmentally smart decision but also financially savvy. If your organization is looking into commercial solar, we explain the most common types of commercial solar financing options below.
1. Cash and Loans
Whenever possible and suitable for the owner, cash is typically the best financing option for companies looking to reap the benefits of federal and state solar incentives and accelerated depreciation. As part of the Inflation Reduction Act passed in 2022, the 30% solar tax credit was reinstated and extended through 2032. This incentivizes businesses to go solar and offsets nearly one-third of the system cost.
Although a cash purchase has a few downsides, the biggest con would be access to capital. Only some companies have the required money to make a full cash purchase, but combining cash with a loan or lease can maximize the ROI of your commercial solar investment.
Low-interest loans or lines of credit with an existing banking relationship generally offer the fastest and most lucrative return outside an all-cash purchase. In general, financing only the necessary portion of the net cost is typically recommended after incentives are applied to achieve the best payback.
2. Leasing for Non-Profits
A lease typically offers a higher monthly payment and only translates into immediate ownership. At the end of the lease term, organizations generally can negotiate a buyout. Buying out a lease usually has lower fees than buying out a PPA, another added benefit to leasing should you choose this commercial solar financing route. Several lease programs are available to for-profit companies with a tax liability.
As part of the Inflation Reduction Act, non-profits can receive a direct payment of up to 40% of the system cost with no tax liability needed. Because of this lucrative incentive, leasing frequently doesn't turn out to be the best financing option. At Sun Valley Solar, we don't currently offer a lease due to the competitive nature of the IRA benefits.
The biggest con to leasing a commercial solar energy system is that there is no direct ability to take advantage of tax and depreciation incentives. These incentives go a long way in helping reduce the cost of commercial solar energy systems and speed up the ROI on this kind of investment.
3. Solar Service Agreement/Power Purchase Agreement (SSA/PPA)
Power Purchase Agreements, also called Solar Service Agreements, have long been used by utilities and municipalities to finance the purchase of electrical generating facilities. PPAs are a common way to finance solar installations at commercial and institutional facilities in certain states. With a PPA, you pay for only the generated power and typically lock in energy rates lower than what utilities offer. Like leasing, PPAs cannot take advantage of tax and depreciation incentives.
4. Public Financing
Some businesses may qualify for public financing options, such as bonds, grants, or other incentives available only to specific rural businesses and non-profits. These options may provide favorable financing terms or reduced interest rates, making them an attractive choice for eligible organizations.
Eligibility requirements and availability may vary by location, and businesses may need to navigate a complex application process. It's also typical with public financing that organizations combine several financing options to reach the full amount needed.
Financing Your Commercial Solar Project
It's essential to carefully evaluate each financing option's pros and cons based on your business's unique needs and circumstances. Factors such as available capital, tax implications, long-term cost savings, and clean energy goals should all be considered.
Commercial solar funding options are diverse and offer organizations flexibility in aligning their financial goals with clean energy initiatives. Whether through cash/loan, lease, SSA/PPA, or public financing, businesses can leverage these options to realize immediate and long-term financial benefits while positively impacting the environment. With careful consideration and expert guidance, your organization can find the right financing model that suits your unique needs and paves the way toward a more sustainable future.
Suppose you've been thinking about adding solar to your commercial operation or want to learn how solar can help your business and its energy goals. In that case, we invite you to schedule a consultation with a member of our commercial solar team. Do you need more time for a consultation but want to learn more? Contact us today!
This blog has been updated from its original publication date of 10/20/2020 to reflect current funding options.