Why Commercial Solar Needs 'FinTech'

Why Commercial Solar Needs 'FinTech'

As has often been noted, the commercial market segment is not installing solar nearly as rapidly as residential and utility-scale. Reasons for this are myriad and complex, but one of the most agreed upon hurdles in this market is limited access to affordable capital. Availability is particularly limited for smaller (and often unrated) projects. We define these as 100-300kW rooftop systems.

Scarcity of affordable capital exists because unrated projects don’t fit neatly into an existing financial model, forcing lenders to perform offline, bespoke diligence on each project. This type of one-off, customized project review causes two problems.

First, a lack of cost-effective finance options in the first decade of solar’s growth, caused originators, financing entities, service providers and the market at large to view the only attractive commercial customers as those capable of paying cash or boasting investment-grade credit. This amplified the initial lack of focus on the mid-sized commercial solar market.

Second, the manual and customized nature of project review means that each financed project is not contributing towards a scalable model, as opposed to the contribution that each home mortgage, car loan, or credit card is making towards the collective understanding of its relevant capital market. Just because we can’t currently use a standardized FICO score or Moody’s rating to evaluate the risk of an unrated solar project does not mean we should resign ourselves to a commercial solar market that is stunted by a limited and tedious financing process. A standardized and universally accepted diligence process can and will exist.

Cue Silicon Valley’s newest darling - ‘FinTech’ (financial technology). In the past ten years, an array of lending platform companies have helped us rethink the way - and to whom - loans are issued. By focusing on a particular type of loan, or a particularly underserved market, these companies have been able to build more efficient lending processes and remove pain points. The results are a simpler and more streamlined borrower experience that lures demand away from more traditional competitors. Having unlocked a new lending market with a software-based approach, these platforms now have the data stream needed to feed a continuously improving model for loan evaluation. A well-developed learning model creates a positive feedback loop which narrows in on the most important pieces of evaluation data, increasing lender certainty, reducing rates, and further improving efficiencies for both lender and borrower.

Traditional lending approaches have failed the commercial solar market for a decade, and provide little reason to believe that will change anytime soon. Instead, this market will be unlocked by software-based solutions that reduce costs on both sides of the process while simultaneously creating a new model for project evaluation. No single improvement will do more for overall soft cost reduction, particularly in the commercial space. Financing is just a sliver of the soft cost pie but how often does that number include not just the high cost of interest for commercial financings, but also the man-hours spent sending documents back and forth, the revenue lost from a project’s financing falling through, and the leads not pursued because they couldn’t pay cash? If the commercial solar market is to live up to the enormous potential that its residential and utility siblings have shown, we must rethink and remake how one of the world’s oldest industries works with one of its newest.

Join us at S3: Solar Software Summit on May 10th to talk more about how software and finance can open new markets and keep the industry growing.

Learn more about Wunder's financing products here.

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