Which type of bank and photovoltaic financing method is the right one for your investment project? In this article, you will learn about the optimal preparation for a financing project: which documents you need and when a debt restructuring might be worthwhile.
Photovoltaics are a tried and tested technology that guarantees feed-in tariffs by law and the resulting cash flows can be easily planned. No wonder that banks are very eager to finance photovoltaics.
Which bank is the right one?
Not all banks used for day-to-day transactions have experience with photovoltaic financing and therefore do not always offer the best financing. Very often they require collateral that have nothing to do with the photovoltaic system.
In addition, they are often subject to the regional principle and may therefore only finance projects in their own region. Banks specialising in photovoltaics, on the other hand, operate nationwide and offer pure project financing.
Advantages of project financing
Photovoltaic projects are often realised via project financing for good reason. In contrast to classical main bank loans, no personal securities such as guarantees or private land charges usually have to be provided to finance a photovoltaic project. Only the photovoltaic system itself and the income generated by it serve as collateral.
This is because project financing is designed to ensure that the repayments are secured by the generated income (cash flow). For this purpose project organisations are often founded, however this is not a prerequisite for photovoltaic financing.
The equity ratio for project financing is usually between 10 and 30 percent. This ratio is mainly the result of the surplus liquidity of the photovoltaic system, which is available for financial service, i.e. interest payments and loan repayments. This also includes banks’ internal risk discounts, which the project must also generate.
When should you restructure your debt?
- If you have provided personal collateral.
- If you pay excessive interest.
- If there is scope for additional financing.
Tip: After 10 years, in Germany you legally have a special right to terminate the contract according to § 489 BGB.
Differences in the repayment terms
There are two common types: amortization and annuity loans. With an annuity loan, a fixed interest and repayment rate is agreed on a monthly basis, in which the interest portion becomes smaller and smaller and the repayment portion larger and larger over time – but your installment rate remains the same.
In the case of a redeemable loan/debt (e.g. promotional loan from the Kreditanstalt für Wiederaufbau (KfW)), the repayment percentage always remains the same and the interest percentage decreases continuously within the installment – your overall installment is therefore higher at the beginning and decreases over time.
Take a look at the type of repayment offered to you and consider what suits you and your project best. Also make sure that you are granted a special repayment right.
The interest rate of a project financing depends on the fixed interest rate and the creditworthiness of the customer or the project. If the conditions are currently favourable, a long fixed interest period is recommended, you receive a planning security. KfWBank’s conditions, which are graded according to project size, offer good orientation for you and the banks (see KfW program 20/3/10).
Steps towards photovoltaic financing
In addition to complete documents for financing, banks have specific requirements regarding the lease and collateral agreements. It must be demonstrably ensured that the photovoltaic system can be operated at the location and that the bank itself has access to the system if necessary.
Some banks also require that a repayment reserve be saved in a special account. It may also be required that repair reserves be set up.
Financing with less equity
Photovoltaic investors are repeatedly faced with the dilemma that the equity capital share required by banks is higher than can be represented by their own resources or is economically sensible. In addition, banks sometimes provide the loans with considerable delays.
In such cases you can integrate alternative forms of financing such as “mezzanine capital” into the project financing.
Mezzanine capital (from Italian “mezzo” = “half”) offers a mixture of equity and debt capital functions. Depending on its structure, it is more similar to equity or debt capital. Mezzanine capital is suitable for financing larger project volumes. A key difference to a bank loan is its subordinate status in the event of liquidation.
The bank, on the other hand, has priority over all other capital providers in order to be able to provide the necessary capital in the event of liquidation (e.g. insolvency). In addition, banks generally only finance on the basis of collateral. In return, banks offer the most favourable financing conditions.
Use cases for mezzanine capital
- Supplementing the equity capital in project financing.
- Replacement of equity tied up in ongoing projects.
- Financing project development and interim construction financing.
Mezzanine capital is often unsecured, qualified subordinated and with pre-insolvency
Enforcement block is in place. This means that payments (interest or repayments) can be suspended (usually deferred) if this is necessary, to prevent the issuing company from becoming insolvent. The investors thus assume a higher risk, which lies between that of the bank and that of the equity capital providers.
For this higher risk, they naturally expect an interest rate that is higher than that of real debt.
You can raise mezzanine capital through your own network or through specialised service providers such as crowd investing platforms. They organise the settlement and provide access to their own investor network.
Checklist of the documents you need to secure a photovoltaic financing
You must submit numerous documents to the bank for financing. These include:
- Company documents, such as current excerpt from the commercial register, shareholder agreement and copies of identity cards
- Project information, such as photos of the plant, annual accounts of the feed-in tariff, proof of registration in the market master data register, liquidity overview, feed-in commitment, insurance contract, if applicable subsidy surcharge (from 750 kWp) as well as, if applicable, development plan and eligibility for remuneration according to §§48 (1) EEG 2017 (open space), photovoltaic yield expert opinion, current service contracts
- Documents securing the land, such as current land register extracts, official site plan, copy of the notarial easement certificate
- If applicable, lease agreement, including the bank’s right of entry, waiver of the landlord’s lien, term, etc.
This article was created with the kind support of Jonas Becker, Business Development Manager, wiwin GmbH & Co. KG.