From debt to equity, there are many ways to finance your energy project, some with federal, state and council support. There is even a clever way of splitting the cost between landlords and tenants. Read on to find out more.
How to find the best energy finance deal
Apart from your own cash, debt finance is the most widely used vehicle for any expansion project, including energy supply and efficiency. Since the Reserve Bank of Australia dropped the official cash rate in 2019 to the lowest level ever of 0.75%, now could be a good time to consider this type of finance.
For both secured and unsecured loans, interest rates have dipped well below 5%, offering businesses the opportunity to refinance existing debts and extend for new energy initiatives.
As for equity financing, loans will preserve your working capital. However, you will need to show a proven track record of generating cash and having substantial assets. There is also a longer process before you can access your funds.
Discounted ‘energy-efficiency’ loans
Thanks to the Clean Energy Finance Corporation’s support to Australia’s major banks, discounted loans are on offer for works improving the energy efficiency of your operations. Up to a percentage point could be shaved off a standard business loan, and there is a wide range of contracts available from the banking sector.
These loans typically cover the new equipment that will achieve a higher efficiency and the asset itself is held as security for the loan. The cost of Type 2 energy audits may be included in some cases.
And it’s easy to apply: the process is often online and approved within hours of completion.
Environmental Upgrade Finance
Environmental Upgrade Finance (EUF) is well suited for tenants and landlords thanks to its flexibility and rapid access. It is carried out through your local council and although it is not available everywhere, City of Yarra and many other Victorian councils are participants in the scheme.
What makes EUF attractive is that it is paid back through property rates, thus having minimal impact on your cash flow, and no security is required.
With slightly higher interest rates than bank loans, this loan has a 4 to 20 year fixed term, no specified maximum, and repayments can be split between landlord and tenant.
Federal and state government grants and funding
Many grants and funding opportunities are regularly announced by both federal and state government agencies.
A good way to stay abreast is to regularly visit the federal grants and funding web page, which also lists Victorian programs, tax incentives, rebates as well as the small business programs of the Clean Energy Finance Corporation.
Also called Energy Service Agreements (ESA), they allow you to acquire a solar system, possibly with battery, without any capital outlay. The lessor designs, builds and operates the system for you, and supplies all electricity to you. At the end of the lease, you may acquire the asset and enjoy free or very low cost electricity.
Compared to other financing options, an ESA may cost more over time, however, your payments are tax deductible, and you don’t carry more debt on your balance sheet. It is an excellent way to contribute to the environment from day one.
Lease contracts typically run for a 5-10 year term with fixed payments. As the lessor takes on the financial risk of the project, we advise that you pay special attention to the exit clauses, were your business situation to change.
Equity capital raising
You may consider selling a part of your company to an investor or group of investors with the purpose of using the funds on an energy project, as part of a business expansion.
Like debt, equity does not affect your working capital. Unlike debt, it does not carry the burden of repayment and the cost of interest. Instead, it brings shareholding partners to your company, voting rights and sharing in the profits.
Capital raising is a common practice among large companies, and is a valuable alternative for small and medium businesses.