Tuesday Tuneup- #23
Understanding project financing
Happy Tuesday everyone!
This week Im going to talk all about project financing for home improvement contractors and although it’s not the most luxurious topic in the world, I assure you this is a topic that is extremely important to anyone in the home improvement space. The depth of the financing world is also something I couldn’t possibly cover fully in one week, so you like this particular topic, please let me know (Comment below) and I’ll keep covering it. This week, I’ll be discussing some very high level basics of how things work.
First, a very brief background on myself so you have some mild assurances I know what I’m talking about. I started my sales career in the finance world, working in insurance, estate, tax and retirement/ pension planning. I was in that space for 8 years, working across the country from the California Department of Corrections, to that Palm Beach Fire Department in Florida, to thousands of homes in the middle.
When I jumped into Solar, I Googled “Best places to work in Sacramento” and a mortgage company popped up that was looking to get into solar. That company was called Paramount Equity Mortgage, which grew to a large solar business and was acquired by SolarCity. The backbone of Paramount Equity Mortgage later became the lending giant GoodLeap.
Other highlights in my career include:
Over 100,000 funded home improvement projects.
Building an exclusive fund (basically starting a finance company).
Having jobs sold through banks, that got shut down by regulators. (means they can’t fund your jobs)
Having jobs sold through loan aggregators that lose their funding. (means they can’t fund your jobs)
Having to deal with ever changing rates, terms, dealer fees, credit criteria, Approved Vendor List, government regulations, ect.
First and foremost, If you’re not using financing as a MAJOR tool in your home improvement business, you are simply not going to grow. The vast majority of people can’t pay cash for your project and need help paying for it. If they can’t afford your offer, they can’t buy it…..
Secondly, if you are not assisting your customer in getting financing, you are not going to grow at any real scale. I can’t tell you how many contractors think that “Call your credit union” is an appropriate level of guidance, but they are wrong. You, as the expert, need to understand that your customer needs help and need to have a plan in place to help them. Many trades finance 50% of their projects (Some are much higher) and if you don’t have a plan in place for 50% of your customer base, you are dead.
But that’s a story for another day and I’m going to assume you’re the kind of contractor that actually has those relationships in place and helps your customers….
If so, the banks you work with likely have one of the following structures.
1- They are owned by a retail bank or credit union.
Service Finance and Dividend are good examples. Truist Bank bought Service Finance bank in 2021 and has a market cap (What the company is worth) of $59 Billion. Dividend Financial was bought back in 2022 and is Owned by Fifth Third Bank who has a market cap of $29 billion.
Being owned by a bank is awesome. You have tons of money, and as a contractor, you don’t have much to worry about. Banks are incredibly regulated and supervised. If they have a program, chances are its very well vetted and reliable. Because they are lending their own money, banks also tend to have some great rates.
However…… all this regulation can lead to some downsides. They tend to be a little more credit conscious and If a bank becomes too popular, regulators can force them to shut down certain loans. Literally the Fed does an audit, says the bank is too heavy into home improvement loans, and says they can’t lend one more penny because of it. I have personally had this happen to me and we had to rewrite a bunch of jobs because of it.
2- They package and sell loans to investment banks.
Goldman Sachs owns a lot of Solar loans…. like A LOT. But, you can’t just call Goldman to get a loan. Instead, companies like Mosaic originate loans and then sell them off to companies like Goldman.
The benefit of this is that these lenders can pull together a lot of banks to offer out a wide range of products. They aren’t bound to one bank and by spreading risk among many banks they can usually offer a more flexible lineup. They tend to be easier to approve and easier for new contractors to get approved to sell.
However….. as you might have guessed, not lending out your own money has its downsides. For example, if the market has shifted and the loans you made aren’t as valuable anymore. Why would a bank want to buy your 2.99% loan right now when they can get a far better rate elsewhere? As a result, your finance partner may not be able to sell loans on the secondary market and can’t fund jobs anymore. I have personally had this happen to me and we had to rewrite a bunch of jobs because of it.
3- Tax Equity funds
Primarily for financing solar projects. These are funds that are structured to use tax credits for customers that can’t. These funds help a lot of people, but they need stability in the tax credits to operate effectively. If tax credits are unstable these funds tend to get real tight. For example, right now we have a 30% federal tax credit on solar projects that these funds are counting on. If there was a discussion in the fed about moving that to 20%, it can add a ton of uncertainty and you’ll see tax equity funds start to tighten up as they see what’s going to happen.
4- PACE (Property Assessed Clean Energy)
Home improvement loans that are paid for via your property taxes. These can be a great option for people that don’t want a big loan on their personal credit. They also tend to be much easier to get approved for because tax liens are attached to the house and difficult to discharge in bankruptcy. However, they can also be administratively heavy and expensive.
**Important disclosure here that I’m not advocating for one model over the other, nor am I trying to give a detailed breakdown of somebody’s business plan. There are many great companies that excel in their model. There’s also a lot of variations in the industry, and this is just a very generic overview of how these things work. If you have questions about any particular lender, I encourage you to reach out to that lender directly
So, how do we navigate all this?
Here’s my advise….
1- Learn about the industry so that you can help anticipate challenges and opportunities coming up and get ready for them. This newsletter, LinkedIn and your finance reps are invaluable resources for staying on top of things.
2- If you see red flags…. PAUSE. Once you know what to look for, you can start to spot areas of concern. It doesn’t mean there’s going to be issues, but it does mean you can navigate the waters better. Late payments? Tightening guidelines? Lack of response? Feel like you're fighting to get paid?… all good reasons to maybe not stick as much in that one lender for a moment.
3- Diversify. Putting some business with multiple lenders, in multiple structures means you never have all your eggs in one basket. I’m not going to name names…. but there are a LOT of solar companies right now that had their sole financing source dry up over night. That means you have all your backlog with no way to pay you.
4- If something is too good to be true, it probably is. The same lender in #3 was insanely under priced in Q2. Now, contractors have all these loans, that aren’t going to get funded, and they can’t get remotely close on new options. No bueno. For the most part, all lenders play by the same rules. If Nine banks have pricing that is close and One bank has pricing that’s half, you’re likely going to regret it down the road.
5- Be open to having conversations. The guy that works at the bank that’s about to go under either doesn't know it’s going to happen or certainly isn’t going to tell you. If I had to summarize everything into on phrase it would be “HAVE PERSPECTIVE SO YOU CAN DECIDE WHAT’S GOING ON”
Finally, If you found this edition enlightening or helpful, Please share it with somebody who could use the advice (We all know somebody). The more ideals I get, the better the content for all of us. If it brought you none of that and was a complete waste of time…. then please let me know! I appreciate the help either way!
