You’ve carefully assessed your potential client’s needs and have spent hours putting together a comprehensive proposal that, if agreed-upon, will be the first step on the path of transforming that client’s lighting efficiency.
It should be an easy win. But right now, even the most well-thought-out and desperately needed projects are met with, “Well…not right now, but maybe we can look at this next year.”
Cash flow is on everybody’s mind. And if your clients are worried about their cash flow, your proposals may get shelved or even turned down completely.
One way to solve this problem is to offer financing as part of your proposal, allowing the client to minimize the cash flow impact of your project by spreading payments out over a fixed period, at a (hopefully) affordable interest rate.
Is financing the way to go with every proposal, though? And if you want to start offering financing, where do you even get started?
How Retrofit Financing Works
Before diving into how retrofit financing works, it is important to clarify the meaning of some commonly used terms:
Residual value is the estimated value of an asset at the end of its financing term.
Balloon payment is an outstanding lump sum that is due at the end of a loan or leasing period, instead of the full debt being completely paid off throughout its sequence of regular payments.
Lessee is the company receiving the lease.
Lessor is the company or organization providing the lease.
Types of Financing
In general, when companies get financing for their retrofit project, they pursue one of two avenues: debt financing or lease financing.
Debt financing is a loan or line of credit that an organization may get directly from a bank. This type of financing is relatively straightforward but may be difficult to obtain during periods of volatility.
Lease financing is an option that retrofit companies can offer to clients. Typically, retrofit lease finance is implemented as a capital lease.
With a capital lease, the lessor (i.e., you) and the lessee (i.e., your client) sign a lease agreement, at which point the project is financed. A capital lease is recognized on your client’s balance sheet as an asset and liability.
The lessee makes equal, pre-determined payments spread over the life of the lease, which is typically between 30 to 72 months in the retrofit industry. There is no balloon payment or residual value at the end of the lease. The last payment is equal to the first and completes the lease in full, and your client owns their investment outright at the end of the lease.
(It’s worth noting that there is another type of lease financing: an operating lease. Operating lease payments are treated as an operating expense and the lease does not affect the balance sheet. This type of lease is typically used for large purchases of equipment and is not typically used for retrofit projects, however.)
Why Bundle Retrofit Financing into a Project?
Now that you have the basics of retrofit financing under your belt, the big question remains: Is it right for your business?
As it turns out, there are multiple benefits—for you and your customers—to offering financing options.
- First, it creates much better cash flow stability for the client. Building owners may not have the cash available for a lighting retrofit. Or, they have their cash earmarked for a rainy day or another major expenditure. Instead of having to put off the project altogether, financing allows them to get their retrofit done without dipping into their cash.
- Additionally—and very importantly—lease financing may result in a net cash zero or even net cash positive scenario if the monthly savings created by the retrofit exceed the monthly lease payment. If you are accurate about costs and potential cost savings, and amortize the lease accordingly, you can very easily create a no-brainer “win-win” decision for a customer.
- Providing this turnkey solution creates a very appealing option to customers, who may not have the time or credit history to secure financing from a bank. You’re immediately removing a major obstacle from the path toward “yes,” resulting in an easier time closing deals.
- By offering financing, you’re positioning yourself as a trusted partner who is helping your client find a realistic and attainable way to pay for their retrofit project. Instead of providing a big quote and telling the customer to figure out how to pay for it, you are offering them helpful solutions and options.
- Speaking of cash flow, your own cash flow And it can be particularly advantageous to have regular, predictable monthly payments coming in from clients instead of the feast-famine cycle (interspersed by chasing down big invoices) that is so common to the industry. Instead of having to wait 60 or even 90+ days for payment—which can be financially devastating—payment is rapidly received once certain project milestones are met.
How to Add Financing to Your Retrofit Contracts
Fortunately, adding financing to your retrofit contracts does not require you to have expert-level knowledge of the mechanisms and regulations associated with lease financing.
Instead, you simply have to do the same thing you ask your customers to do when they turn to you: rely on the experts. Do some digging to find a good finance partner who can hold your hand, answer your questions, and make sure you’re comfortable with any terms and conditions.
Your financing partner should help you hold your client’s hand as well, providing the resources and support you need to educate your client on their options. This will help them make a confident, informed decision, while helping give you stand out even more against your competition.
Offering financing helps you create a strong case for ROI with potential customers and hopefully position your retrofit projects as cash-flow positive. Helping your clients solve their cash flow issues will go a long way toward keeping your own cash flow healthy and growing.
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