How to secure a Line of Credit for your Solar Business (+ 5 lessons from getting our own worth $1M)

If you’ve ever started a business on your own, you know how hard it is to scale without debt or venture capital. If you’ve ever started a construction business, you know that it can be nearly impossible. At Ipsun Solar, it took us five years to get our first line of credit and six and a half years to get to our first $1M line of credit.

Now if you’re just getting started, you may wonder why you would ever need so much debt. Maybe you’re taking the “cash in, cash out” approach and only working on jobs that you can deliver with the cash your customers provide. That’s possible for a little while, but eventually you will hit a growth ceiling and need outside financing.

Here are the five lessons we learned at Ipsun Solar on the way to our first million dollar line of credit.

1. Cash deals are great while they last

When you start a solar business, you want to (and may have no choice but to) live off cash deals. Your customers pay you as much upfront as it costs you to purchase materials, and get the permits, then you install the job, and invoice for the rest to cover your overhead and margin. Effectively, cash covers your cost of goods (COGS) for the site survey, design, permits, interconnection, aerial imagery, and the actual material itself (solar panels, inverters, racking, etc). Then you cover your indirect costs on the backend when the system is installed and commissioned and the homeowner pays in full.

Sounds great, right?

Until you realize that unsurprisingly, there are a lot of people out there who can’t shell out $35,000 for a solar energy system, and actually need financing.

There’s plenty of financing options out there in the solar industry, but all of them come with strings attached. Most will not disburse to you until the project is actually completed…

…imagine that you offer zero down-payment financing (which is standard), or $1,000 down financing (which we do at Ipsun Solar)...

That means you have to run the entire project from beginning to end with only $1,000 baked into the project.

If you’re like us, it may take you 4-6 months to get the job completed, because of the design, permitting, interconnection, scheduling, procurement, inspection and PTO (permission to operate) process.

Does anyone really think that you can survive on $1,000 in the bank account while floating all the direct and indirect costs associated with a residential solar project?

Absolutely not.

At Ipsun Solar, we historically have seen one third (33%) of our projects require financing. That means we have to float one third of our projects from beginning to end. Now there are certainly some fintech solar lenders who will give you better disbursement terms, but you had better know they are going to charge handsomely for it. Remember those dealer fees that run 25-30%? Well if they are disbursing funds earlier in the process, they are simply taking their cost of capital and baking it into those early disbursements.

If you secured your own line of credit, you would have a transparent cost of capital acquired by your own company, that you could disburse to your operating account whenever it’s needed, without having to rely on the residential finance lenders.

This is the number one reason that you will likely need a line of credit.

2. Supply chains may force your hand

If you’re a solar installer, odds are good that you are also a battery installer.

Sure, you may have been able to hold out for a while, convincing your customers that battery technology is too new, or that they should just buy a gas generator if they want backup. But those days are over.

Consumers want to have battery backup paired with their solar, not just for the certainty that they are backing their home up on clean energy, but because they know the sun is going to rise every day. If we have learned one thing from the Texas winter outage, then it is that there is most certainly not any guarantee that natural gas will flow in all circumstances.

This means that you are now floating even more material costs from the moment the contract got signed to when you are getting the final payment. It also means you are at the whim of manufacturers who may have massive delays because of other priorities, pandemic lockdowns halting supply, or it may simply be that you cannot secure batteries on a per-job basis from your distributor, because they have a minimum order quantity.

Imagine adding $10,000 - 20,000 to your cost of goods for batteries and floating all of that on top of your solar panels, inverters and racking, and then having to purchase five to ten of those batteries for 4-6 months.

That’s exactly what happened at Ipsun Solar, but worse.

When our battery manufacturer first launched their product, we went all in and sold it to about 25% of our residential customers. But when it came time to deliver, we were told that we had to buy in bulk to secure supply. That meant purchasing nearly half a million dollars in batteries.

Because we didn’t had that kind of cash readily available, we required a line of credit to make it happen.

3. You’ll kiss a lot of frogs before you meet the prince

And with frogs I mean banks. And even then it's an understatement.

Banks are old, stodgy, finicky, conservative, slow, bureaucratic and frustrating to work with. Sorry, banks!

You might know the old saying “you’ve got to kiss a lot of frogs before you meet the prince.”. Well, it’s truer in no other circumstance in the solar industry, than in finding the right banking relationship.

At Ipsun Solar, it took us five years to find a bank that understood our industry and business model, had worked with other solar installers, and could tailor a line of credit to our needs.

When we were just getting off the ground, we started with a large national bank that didn’t give us the time of day, because they were focused on much, much larger accounts. Then we moved to a local bank that was very helpful and even took us to hockey and football games! But the line of credit they provided had a “sweep” account, meaning that every time we drew on the line of credit, it had to be repaid immediately by the new dollars coming into the account on the next business days. That is not normal, or particularly helpful, needless to say. So once we realized that this kind of line of credit only made sense if we literally had $0 in the bank account, we went searching again.

We went back to a large national bank that had also worked with solar installers, but offered a more flexible line of credit that didn’t have to be repaid immediately through a sweep account, and also offered a fleet line of credit separately, which added bandwith for purchasing vehicles and equipment. We were over the moon to find this kind of partner – they were responsive and wanted to help us build our business.

However, we hit a wall when we started to near the max amount on that line of credit. Because they were such a large bank, trying to scale the line of credit to match the growth of our company didn’t pan out. We seemed to be stuck at the original cap, and there was no path to growing it as the company grew. When we applied for a higher cap, we found that the metrics they used to determine eligibility were now far more conservative, and inflexible. For instance, their models assumed that all available debt that we had was maxed out, and stress tested our other forms of debt with interest rates that were 2-3% above market rates.

That may be fine for them, but certainly didn’t work for us. We finally found a lender that only works with commercial/business entities, and they offered us our first million dollar line of credit. They also offered an additional million dollars in debt in the form of a corporate credit card and vehicle line of credit, for a total of two million dollars in readily available corporate debt if we had to tap into.

The best part about this commercial-only lender is that they have a formula for growing the line of credit with our business. Once we near that $1M cap, we can move to a flexible line of credit that is equivalent to roughly 80% of our accounts receivable and 50% of our inventory. Finally, a solution that grows as we do!

4. Two Metrics to Rule Them All

Other than keeping a close eye on cash, how do you know when and if you need a line of credit? It’s a great question, because this is not the kind of thing you want to be caught flat footed on. Imagine that you are sailing along, only to find out that your business is growing faster than expected and suddenly you need to add crews, vehicles, equipment, etc.

Or your distributor tells you that you now have to buy all of your materials in bulk, and you need free cash flow beyond what you have in the bank. That is not a fun situation to be in.

There are two simple financial metrics that you’ll want to keep an eye on as your business grows (we have an entire post about other important solar metrics):

The first is current ratio, which simply put means all of your current assets divided by all of your current liabilities.

Your current assets are equivalent to your cash on hand, accounts receivable, inventory, and any other tangible assets.

Your current liability represents your accounts payable, outstanding loans, credit card balances, and any other tangible debts.

When you divide one by the other, you will ideally like to have twice as many current assets as current liabilities, for a current ratio of 2.0.

If you have less than that, you may still be fine. But we would caution against having lower than a 2.0 current ratio and not having a line of credit, or at least be in the process of applying for one.

The solar industry is growing exponentially, and that means your business is likely to grow right along with it. If you find your sales increasing at the same time as your backlog increases, you may want to add crews, which we all know is not a cheap thing.

The other metric to keep an eye on is debt-to-equity, which is almost like the identical twin brother of your current ratio.

Debt-to-equity is essentially all the debt you have in the business (similar to the current liabilities above, but inclusive of any long-term debt like a federal relief loan amortized over 30 years), divided by the equity you have in the company.

Ideally, you should have a debt-to-equity of under 1.0, meaning that your debts are more than 100% of the equity you have accrued. If you do have more debt than equity, it’s time to take a look in the mirror and ask why. It may be that you haven’t fully leveraged the debt you have already built up, and you need to increase your productivity through automations, lowering cost of acquisition or increasing referrals so you can turn that debt into cash and equity.

If this is the case, you may want to hold off on extending any existing debts or lines of credit.

5. Don’t get addicted to debt!

Easier said than done, right?

We live in the western world, which thrives on debt.

So much so, that sometimes it seems like you can’t “get ahead” without it. Sadly the system is built that way.

But if you run a tight business, you are clear on your direct and indirect costs, there is little to no waste in the overhead, and you have a great company culture, then ideally you should only need debt to grow your business.

Eventually, even the best solar businesses in the world will want to grow their business off more than their free cash flow. We do have a planet to save, after all. And if you are just growing your business for every dollar you bring in, well then you may be missing a big opportunity and piece of the pie.

This doesn’t mean that we are encouraging you to take on debt for its own sake.

After all those personal guarantees are not very fun to sign. And you can feel the weight of that debt on your shoulders over the years. However, with the IPCC report telling us that we may only have ten years to save Earth from the worst impacts of catastrophic climate change, it behooves each and every one of us to ask what more we can do to deploy solar faster.

You’re probably reading this because building your business and growing as fast as you can sustain (without growing so fast that you run yourself out of business), is an important goal of yours. If that’s the case you’ll want to find that right banking relationship that (1) understands your business; (2) grows with your business; and (3) agrees with you that the climate crisis is an existential threat. That’s the kind of banker who will be there for you in the long haul.

Then combine it with a world-class software that can help you save cost and bring in additional revenue in every area of your solar business and you are more than prepared for double digit growth.