Why and how does external financing come into play when buying a PV system? What are the advantages and disadvantages? Find out what you should bear in mind when approaching PV financing.

If you want to invest in commercial photovoltaic plants, it makes sense in many cases to increase your own capital with external financing. You shouldn’t wait too long to take this step, as financing costs have risen with the interest rate reversal prompted by inflation. Financial service providers and banks are still happy to finance photovoltaics because the technology is tried and tested and the cash flows can be easily planned.

Which financing options are available?

There are essentially two types: project financing and private loans. Commercial-scale photovoltaic projects are primarily realised via project financing. In most cases, neither a high creditworthiness nor personal collateral such as securities or private land charges are required.

The PV system itself, including the proceeds from the sale of electricity, is sufficient as collateral for project financing. Repayment is ensured by the income generated (cash flow). Project companies are often founded as agencies, but this is not a requirement for financing.

The bank derives the debt ratio amount from the cash surplus of the photovoltaic system, with risk deductions included in the calculation. This usually results in a debt ratio of 70 to 90%. If the required equity share is greater than what you can manage, it may be possible to augment it with the help of mezzanine financing or to raise funds via crowdinvesting platforms – often in the form of subordinated loans.

How can a good financing offer be recognised?

You can assess whether the conditions of PV financing are right for you and which bank is a suitable partner based on the following factors.

Repayment type: Repayment and annuity loans, or mixed forms, are available. With an amortisable loan, the repayment portion always remains the same, while the interest component continually decreases. As a result, the repayment rate decreases over time. With an annuity loan, on the other hand, the monthly repayment amount remains the same.

Over the years, the repayment portion of the total repayment increases, while its interest component decreases. The type of repayment (or a combination of the two) best for you depends on the capital flows of your investment, but also on the offers from your bank. Repayment-free periods can often be agreed upon in order to save repayment reserves for times when yields are low.

Interest rate: The interest rate of the project financing depends on the fixed interest rate and how creditworthy the client or the project is. The conditions from KfW Bank provide a good overview. As a general rule, you should negotiate purchasers’ entry rights so that financing can be transferred to purchasers without any problems, if it becomes necessary.

Fixed interest rates: In the past when interest rates were low, most market participants relied on long fixed interest rates and tried to agree upon unscheduled repayment rights with the bank. Nowadays, with rising interest rates, new diverse strategies are needed for approaching fixed interest rates.

Collateral: In general, you must prove that all requirements for system operation are met and that the bank can take over the system if this becomes necessary. An easement must be entered into the land register not only for you, but also for the bank in equal rank.

With a transfer of the PV system by way of security and the assignment of claims against the grid operator or direct marketer, the bank ensures that it can operate the system itself if payments are not made. Lease contracts must allow for such a scenario. Some banks also require repayment reserves or repair reserves held in special accounts.

Soft factors: Coordination is always more effective if the bank or financial advisor has dealt with photovoltaic projects previously, as experience and at least basic knowledge facilitate the decision-making process and the path to a suitable offer.

Many communication problems and associated delays can be avoided: a prerequisite for success, especially when purchasing at short notice. In Germany, local banks sometimes offer special conditions if the location is suitable in accordance with the “regional principle” dictating banks’ business areas. Banks specialising in photovoltaics usually operate nationwide and offer pure project financing.

Preparing solar financing

Financing occurs in several stages. It begins with the enquiry: you provide key data on performance, yield, costs, and the financing volume and duration. The bank responds with an indication communicating its terms and conditions without obligation.

If you find these appealing, you submit the credit application together with all required details, documents, and evidence, which must be complete by the time of disbursement at the latest. You will then receive a loan offer including a draft contract. You should compare this with the indication and other offers.

Financing documents checklist

Financing requires you to submit a number of documents. These include:

●     Corporate documents, such as current certificate of registration, shareholder agreement, ownership structure, copies of identification documents, and consolidated balance sheets

●     Project information, such as photos, EEG invoices or yield forecasts, liquidity overview, purchase agreement or general contractor’s or work contract, feed-in commitment, commissioning report if applicable, structural analysis certificate, building permit, and insurance policy or offer

●     Documents for securing land, such as current land register excerpts, official site plan, and copy of the notarised easement deed

This article was published in our investment guide. For all other articles and information on Direct investment in commercial-sized photovoltaic systems, please visit: Milk the Sun – PV Investment Guide.