Managing Cash Flow for Solar Installers

If you’re a solar executive who manages the cash accounts for your business, the odds are decent that you check your bank account before you perform any bodily functions each morning. Unfortunately, this is an industry with margins so tight you can barely see them sometimes, and as we covered previously, it’s not easy to get a line of credit or get paid from your customers faster than your vendor terms.

So how does one manage cash in a nascent industry that is constantly changing (not going to say solar coaster, I promise), with volatile sales, equipment pricing, tariffs, codes and standards, high-interest rates, and extraordinary competition?

Here are our five lessons from running Ipsun Solar on managing cash flow.

1. Get creative with credit cards.

When we started Ipsun Solar, we had just one Capital One credit card that we used for everything possible. It took five years to double our credit line from $200,000 to $400,000 because $200,000 was the max that could be allotted to an individual, which was a requirement from the bank for a small business with no track record. In other words, our CEO was personally responsible for that balance, and his credit report incurred massive peaks and valleys.

In retrospect, working with a large corporate bank may not have been the best bet. But we were attracted to the 2% cash back, which Capital One still offers today. If we could do it again, we would cast a wider net for at least one, if not two, more credit cards to diversify and force those providers to give us a better deal on rewards and terms.

Today, we have that Capital One credit card with a $400,000 line and NET30 payment terms and a corporate card from another provider, which integrates with our Netsuite ERP to automatically sync transactions once approved. It also makes it easy for us to distribute cards with specific spending limits to managers. In addition, the corporate credit card provides less rewards (1.5%) but longer to pay (NET45).

2. Consider Quartix to negotiate better vendor terms

Quartix has a creative model which allows you to negotiate better payment terms with your vendors by giving them the ability to pay a small fee for receiving cash earlier. If you have NET30 terms with a vendor today, you could negotiate to extend it to NET60, and in exchange, Quartix will make their cash available anytime in those 60 days for a small daily interest charge. For instance, if the vendor wanted to get paid on Day 24 of the newly negotiated NET60 terms, they might pay 36 days of daily interest at a nominal rate to gain access to that cash. This provides them with maximal flexibility to get paid and gives you a tool to negotiate for longer payment terms.

Quartix also has a “Buy Now Pay Later” feature for solar installers which is essentially the same value proposition in reverse: you can pay a small daily interest fee to extend your payment terms up to 120 days. Now, of course, while the interest paid daily is nominal on its own, it adds up to a greater APR than you would pay on a bank line of credit or through a credit card that is paid on time with NET 30-45 terms.

But if you’re looking to float cash in a structured way, the “Buy Now Pay Later” feature is a kind of mezzanine financing for solar installers that can be a convenient option to have in your back pocket.

3. Take a hard look at what you pay distributors for terms

If your sales and install volume is modest, then you may not be able to purchase directly from manufacturers. But more and more manufacturers are offering direct sales to solar installers (e.g. Emporia, AP Systems). If you are buying equipment from a distributor who is more than happy to give you NET60 or NET90 terms, there’s a good reason.

Distributors offering you these terms are baking in their cost of capital and passing it on to you. Still, because it’s opaque, you cannot know what interest rate you’re getting on those extended terms. We have seen module prices as much as $.10-15/Watt higher through distribution than through direct purchasing from manufacturers! Now if you don’t have the option to buy directly, that’s one thing. But you might consider an account with the Megawatt Group, which purchases modules in bulk and passes on the savings to installers. Getting a quote from them could give you insight into how much more you are paying for those attractive terms.

If you’re installing 3 megawatts per year, that additional $.10/Watt for NET60 terms (now common among big distributors), can amount to $300,000 per year in additional cost. That’s the most expensive cost of capital you’ll ever find, and you should be shopping around as much as possible to either buy direct or get multiple quotes from other distributors for better pricing and terms.

While manufacturers most often require NET30 payment terms, you’ll save much more at the end of the day by purchasing direct or through a buying cooperative, and using strategies for cashflow management listed above, than you would for buying through distribution.

4. Use an honest, transparent lender that offers upfront disbursements

You know the pain if you’ve ever used a lender that backloads your payments. Waiting for PTO or up to 30 days post-PTO is brutal for cash flow and can tank a business. We’ve heard horror stories from some of the biggest solar companies in the country who had their payment terms changed overnight with zero notice, only to find out that they can’t make payroll. But, of course, those fintech lenders had the right to do it, buried in hundreds of pages of legalese.

But is that the kind of lender you want to do business with? We have found that there are honest, transparent lenders out there who will offer upfront disbursement to creditworthy installers and won’t change their payment terms overnight without due notice. Credit Unions may not have the ease of the private fintech lenders regarding approvals or credit scores. Still, you can build excellent personal relationships with them, get better rates and fees, and tout their people-over-profit focus to your customers.

At Ipsun Solar, we have been thrilled with our experience with Credit Human, which offers upfront disbursements for creditworthy installers and has lower interest rates on their zero-dealer fee loan products than just about anyone in the country. Going from having most of our disbursement backloaded to front-loaded is the single biggest thing we have ever done to improve our cash flow.

5. Offer your customers a cash or upfront payment discount

If your business is like Ipsun Solar, you have plenty of people who could pay cash but opt to do something other than do so. By offering a cash discount, you can encourage homeowners who might have otherwise taken your loan option (simply because they wanted to float cash) to utilize their own financing instead. For 99% of installers, your cash payment schedule will be preferable to your loan disbursement schedule, and you could divert many homeowners to cash with this simple tactic.

Similarly, you could offer an upfront payment discount of 1-2% for paying the entirety of their project cost upfront. While you won’t get big uptake on this one, having cash paid upfront for a solar project that is $30,000-100,000 will help your cashflow, and spending 1-2% in the form of a discount will be one of the lowest costs of capital you ever utilize.

It can also be helpful to define the final payment milestone as passing inspection since waiting for PTO to turn the system online is entirely on the utility and can sometimes take longer than 30 days. Making this clear to your customers on the front end will avoid confusion on the back end, especially if they understand how it will help grow the solar industry with more sustainable cash flow for your business.

These are just a few lessons we have learned over the years in running Ipsun Solar. So what have you done to improve your cash flow? We would love to hear your strategies!