Guide to Bridge Financing For Solar EPC Contractors

Over the past month, I’ve seen a pick up in the amount of companies that are offering ‘bridge financing’ to small and middle size solar PV contractors. So, I thought I would put together a short post and a free downloadable guide based on my research that outlines what bridge financing is, the best markets it works in, the type of EPCs that tend to be best suited for bridge financing, how exactly it works, and some good firms that offer it.

If you’re serious about financing solar pv projects, I have three resources for you.

1. Download the Commercial Solar Finance Model 
2. Read the Guide to Financing Commercial Solar Projects
3. If you need to learn how to finance commercial solar projects, click here to apply to take our Solar MBA Training

Below Download the Guide to Bridge Financing to Learn

1. Typical Terms for Bridge Financing
2. How specifically does it work? what are the cash flows and timelines?
3. What bridge financers look for in EPCs
4. Companies that are offering bridge financing

What is bridge financing?

Bridge financing is used as a means to maintain liquidity (cash reserves) where there is an anticipation inflow of cash. In the solar PV industry, the anticipated cash flows tend to be utility or state cash rebates, and before 2012, the 1603 cash grant program.

Bridge financing is becoming more and more common in the solar PV industry as smaller firms, those with less cash, are trying to compete with larger firms that have more cash.

You may ask why this would even exist? If you KNOW that you’re going to get a cash rebate in 6 months, or whenever construction is completed, why would you loan money against the rebate for such a short period of time?

All of my research points to the client. It’s all about closing projects. In many markets, two proposals from solar PV EPCs might look exactly the same, except for the payment terms as the client sees it.

Typical payment terms for a small solar PV firm might look like this.

• $10,000 deposit
• 25% of installed cost when construction begins
• 25% when it’s half completed
• 50%, or the remained, when the project is commissioned.

Larger construction or solar EPC companies that are competing against smaller solar firms use their size as an advantage during the sales process by offering better payment terms to the client. For example, payment terms from a large solar EPC contractor might look like this:

• $10,000 deposit
• 100% payment when the project is completed.

The reason that the larger firm can provide these better credit terms becasue they have enough cash on their balance sheet to pay upfront for all the equipment and labor needed to build the project without ever receiving any cash from the client. Smaller firms cannot do this because they simply do not have enough cash to purchase all the materials and labor for the project without collecting any cash. This gives larger firms a huge advantage, especially on commercial projects competing against smaller firms that are trying to grow.

A client is much more likely to go with the better payment terms for a simple reason, it removes all construction risk, they only pay for a product once it’s been installed and proved to work.

Bridge financing provides small solar PV firms the ability to offer better credit terms to a client because they can get cash on day 1, with cash rebates as collateral, to purchase equipment and pay for labor. They can use this cash to purchase equipment and can bill the client later.

What solar markets does it work best in?

These days, the only collateral that financiers will accept is cash rebates from utilities or state agencies. Thus, the best markets and only markets where bridge financing that is being used extensively is in states with strong cash rebate programs.

What installation companies are best suited for bridge financing?

All EPCs company could use bridge financing, key word being could. However, bridge financing has a cost. Financers typically take a 5% base fee that increases depending on how long it takes them to collect the cash rebate. After 60 dyas will typically cost more then 5%.

Thus, larger companies that have enough cash tend to not use bridge financing, while smaller companies will. The smaller firms will build the financing costs into their installed costs, or they will keep the same installed costs per watt, and lower their margins to make up for the financing costs.

What’s the benefit of bridge financing? How does it help an EPC?

The largest benefit to a small solar EPC companies that is looking to grow by selling larger projects is two fold

1 – It allows them to compete against much larger EPC companies, especially if a client is accepting multiple bids.

2 – It provides them liquidity at the beginning of the project is they have limited amounts of cash.

What aren’t big banks stepping up?

The reason that big banks are not stepping up is simple. The size of each deal is relatively small. For a solar EPC that has been doing residential projects that wants to sign a 100kW deal, it’s a huge sum of money for the solar EPC, but not a large sum for a bank. At $4/watt, the total project size is $400k, and total construction costs will be around 70% of that, $280. Depending on your location, cash rebates tend to be between 10% and 40% of installed costs, which is between $40k and $160k. Most of the time, this is too small of an amount for a bank to look at, especially considering they still view solar as a risky investment.

Below Download the Guide to Bridge Financing to Learn

1. Typical Terms for Bridge Financing
2. How specifically does it work? what are the cash flows and timelines?
3. What bridge financers look for in EPCs
4. Companies that are offering bridge financing

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