Is a green loan actually cheaper than a normal business loan for solar?

The short answer

A green loan can be cheaper, but the word "green" does not make it so. The market standard, the Green Loan Principles, first published by the Loan Market Association in March 2018 and issued jointly with the APLMA and LSTA since December 2018, defines a green loan by where the money goes and how that is evidenced. The current version, dated 26 March 2025, says nothing about the interest rate. Whether a particular green loan beats a standard business loan comes down to the things that price any loan, plus the cost of the green paperwork.

What makes a loan green

Under the principles, a green loan is one whose proceeds "shall be exclusively applied" to eligible green projects and which aligns with four core components:

1. Use of proceeds. The money must fund green projects, described in the finance documents. Renewable energy, "including production, storage systems, transmission, appliances and products", is the first category listed, so a rooftop array or a battery fits.
2. Project evaluation and selection. The borrower explains the environmental objective, how the project fits an eligible category, and how environmental and social risks are managed.
3. Management of proceeds. The money is credited to a dedicated account or otherwise tracked.
4. Reporting. The borrower keeps up-to-date information on how the money was used, renewed annually until the loan is fully allocated, ideally with measures such as electricity generation or emissions avoided.

The principles are voluntary and applied deal by deal. Where a borrower cannot show the in-house expertise to confirm alignment, they recommend an external review; otherwise self-certification can be enough. Two practical points follow for a solar project. If part of the spend is not green, a facility "cannot be labelled as green if it includes a green and non-green tranche", so you may end up with two facilities. And whatever the principles say, some lenders ask for annual reports or periodic check-ins, which take management time.

How UK lenders present green loans to smaller businesses

The British Business Bank describes SME green loans as "typically restricted to funding sustainable business activities such as investment in renewable energy, green buildings, and pollution prevention", and points to examples from HSBC, Lloyds, Barclays and Virgin Money. It attaches the caveats that apply to any loan: some "may require security such as business or personal assets", and approval is "subject to status, application and eligibility". Neither that guidance nor the principles promise a lower rate. The bank's research found 11% of SMEs, roughly 700,000 businesses, had used external finance for net zero actions.

There is a government angle too. The Growth Guarantee Scheme, which gives accredited lenders a 70% guarantee on facilities of generally up to £2 million, is running a pilot, Green GGS, to improve its support for businesses investing in sustainable assets. The guarantee protects the lender; the borrower remains fully liable.

A sustainability-linked loan is a different product

A sustainability-linked loan sounds similar but works differently. Under the separate Sustainability-Linked Loan Principles, the use of proceeds "is not a determinant", and in most instances the money is for general corporate purposes. Instead, the loan's terms move with the borrower's performance against pre-agreed sustainability targets. The most common version is a margin that falls when targets are met "and vice versa". Performance must be verified by a qualified external reviewer, such as an auditor. That suits a company with measurable, company-wide targets more than one financing a single installation, and the verification cost comes out of any margin saving.

Where the real cost of a loan sits

The British Business Bank puts it simply: "The rate of interest you pay depends on how risky the lender deems it is to advance you the money." Good personal and business credit scores and a willingness to offer security reduce that risk, and unsecured loans typically carry higher rates than secured ones. So compare the total cost, not the label:

• Fees: whatever the lender charges to set up and run the facility, plus charges if a payment is late or missed.
• Security: a lower rate secured on your premises, or backed by a personal guarantee, is not like-for-like with an unsecured rate.
• Term: longer loans have lower monthly repayments but cost more interest in total. Match the term to the system's payback, not to the life of the panels.
• Early repayment: the lender "may charge you for paying off your debt early".
• Rate type: floating rates can move with the Bank of England rate; fixed rates do not.

Illustrative arithmetic, not a quote: on a £60,000 repayment loan over five years with monthly instalments, taking 0.25 percentage points off the rate saves about £410 to £440 of interest over the whole term, at any starting rate from 5% to 10%. That is roughly £7 a month. An arrangement fee of 1% of the loan, £600, would more than cancel it. A green discount is worth having; check that it survives the fees, security and term before it decides the choice.

Before choosing, ask each lender the same four questions: what the rate and fees would be with and without the green label; what reporting it requires, and for how long; whether it needs security or a personal guarantee; and what repaying early would cost. Put the answers side by side and compare the total repayable over the term.

When a standard loan or hire purchase can be the better fit

• No discount on offer. If the green product is priced like the standard one, the reporting is cost without benefit.
• Mixed spend. If the project includes items that are not green, splitting it into two facilities may cost more than one standard loan.
• You want the asset to be the security. With hire purchase, the asset is the security, so there is no need to put up other assets, and ownership passes when the payments are complete. For panels fixed to a building, though, HMRC says the hire purchase rules do not apply to fixtures; the fixtures rules decide who claims the allowances, as explained in who claims capital allowances on solar panels on a lease.
• Balloon structures. Lower monthly payments with a final balloon payment tend to mean a higher total cost over the term.

For how a loan-funded purchase works end to end, this site's page on green loans for business solar covers the mechanics, and finance options compared lines every route up side by side. The wider checks a lender runs, from accounts to the grid connection, are covered in what lenders check before funding solar.

The tax angle: the label changes nothing

Tax relief on borrowing follows the purpose of the loan, not its label. A sole trader or partnership can claim "interest on bank and business loans" and "hire purchase interest" as allowable expenses, but not repayments of the loan itself. For a company, debits on a loan it is party to for the purposes of its trade "are treated as expenses of the trade which are deductible" (Corporation Tax Act 2009, section 297). Because interest is deductible, the after-tax value of a rate discount is smaller than the headline saving.

The system is treated the same however it is funded. Solar panels sit in the special rate pool, written down at 6% a year, but the annual investment allowance gives full relief on up to £1 million a year of qualifying spend, and special rate expenditure can qualify. Above that, a company can claim a 50% first-year allowance on new and unused special rate plant, with the balance going to the special rate pool. See how capital allowances work on solar for the detail, and confirm the treatment for your business with your accountant. If you want to see the numbers for your own site, you can request a costed quote.

Questions business owners ask

Is a green loan cheaper than a normal business loan?

Not automatically. The Green Loan Principles define a green loan by what the money funds and how it is tracked and reported, not by its price, so any discount is the lender's choice. The British Business Bank says the rate you pay depends on how risky the lender judges the loan, so compare total cost, including fees, security and term, rather than the label.

What makes a loan green?

Alignment with the four core components of the Green Loan Principles: use of proceeds for eligible green projects, a process for evaluating and selecting them, tracking of the proceeds, and reporting on how the money was used. Renewable energy is the first eligible category listed, so a solar installation fits. The principles are voluntary and are applied deal by deal.

What is the difference between a green loan and a sustainability-linked loan?

A green loan is tied to what the money funds; a sustainability-linked loan is tied to how the borrower performs. Under the Sustainability-Linked Loan Principles, use of proceeds is not a determinant, and the margin commonly moves with pre-agreed sustainability targets, down when they are met and up when they are not. Performance must be externally verified, which adds cost.

Is loan interest on a solar system tax deductible?

Yes, for a trading business, whether or not the loan is green. Sole traders and partnerships can claim interest on business loans and hire purchase interest as allowable expenses, though not the loan repayments themselves. For a company, debits on a loan taken for its trade are deductible trading expenses under section 297 of the Corporation Tax Act 2009. Confirm the detail with your accountant.

Should I choose hire purchase instead of a green loan for solar?

It depends on the total cost and the security you want to give. With hire purchase the asset is the security, so no extra collateral is needed, and ownership passes when the payments are complete. For panels fixed to a building, HMRC says the fixtures rules, not the hire purchase rules, decide who claims the capital allowances, so check that point before signing.