Solar loans for small business: will the saving cover the repayments?

Solar loans for small business: the cash-flow test

Solar loans for small business come down to one question that a quote rarely answers: does the system save more each year than the loan costs each year? If it does, the project is cash-flow positive from the first month and the loan funds itself. If not, you are topping it up from the business until the loan ends, even though the system pays back over its life. This page gives you the test, a worked table with every assumption labelled, and the points where a small business's tax and security position change the answer. It is general information from an independent publisher, not financial or tax advice.

The test in one line

Annual saving (bill reduction plus any export income) minus annual loan repayments (twelve times the monthly payment) is your net annual cash flow before tax. A loan can be right even when this number is negative, because the equipment may last far longer than the loan, but you should know the figure and the business should be able to carry it. Repayments of the capital are not a tax-deductible expense, while the interest part is, so the test is run on cash and the tax effect is added afterwards.

Worked example (illustrative, not a quote)

Assume a business borrows 100% of a £60,000 system and that the system saves £9,500 a year in total. Both figures are assumptions chosen to show the method; they are not market prices or a prediction for your roof. The interest rates (7%, 9% and 11%) are also assumptions and not offers from any lender. The monthly payment is the standard repayment-loan formula with monthly compounding and equal instalments.

Term	Assumed rate	Monthly payment	Annual repayments	Net annual cash flow (saving minus repayments)
5 years	7%	£1,188	£14,257	-£4,757
5 years	9%	£1,246	£14,946	-£5,446
5 years	11%	£1,305	£15,655	-£6,155
7 years	7%	£906	£10,867	-£1,367
7 years	9%	£965	£11,584	-£2,084
7 years	11%	£1,027	£12,328	-£2,828
10 years	7%	£697	£8,360	+£1,140
10 years	9%	£760	£9,121	+£379
10 years	11%	£827	£9,918	-£418

Three things stand out. First, at the same rate, stretching the term from five to ten years is what turns a negative cash flow positive, which is the main lever a business has. Second, the rate matters less than the term in this example: at 9% over seven years the total repayable is about £81,089 against £91,207 over ten years, so the longer loan costs roughly £10,118 more in total while easing the monthly strain. Third, the same system can look affordable or unaffordable depending only on the facility terms, so compare offers on both numbers, not on the headline rate.

Add the tax effect

Borrowing to buy does not change who owns the panels, so the business can claim capital allowances on the original cost, not on interest or charges. All capital expenditure on solar panels is designated special rate, but special rate spending can still qualify for the Annual Investment Allowance of £1 million per accounting period, claimed in the period the item was bought. On the £60,000 system above, full relief would reduce a company's taxable profit by £60,000. At the 19% small profits rate (profits of £50,000 or less) that is about £11,400 of Corporation Tax, and at the 25% main rate (profits over £250,000) about £15,000, in both cases only if the business has enough taxable profit to use the allowance. Companies in between pay marginal rates, and sole traders and partnerships pay Income Tax instead, so use your accountant's figures.

Loan interest is an allowable expense; capital repayments are not. That is why we run the cash-flow test on actual repayments and show tax as a separate line. For the allowances themselves, see capital allowances on solar panels and the Annual Investment Allowance guide.

Secured, unsecured and the personal guarantee

The British Business Bank says a personal guarantee is usually required for unsecured business loans, and that unsecured loans tend to have higher rates than secured loans. The Growth Guarantee Scheme gives the lender a 70% government-backed guarantee but leaves the business 100% liable, and although lenders may take personal guarantees under it they cannot take the owner's principal private residence as security. If your solar loan is on a limited company, ask the lender in writing whether a personal guarantee is required, for how much, and when it ends.

What moves the answer

• The term. Longer is gentler on cash flow and costs more in total interest, as the table shows.
• The saving. It depends on how much of the output you use on site. Our payback and ROI guide explains the build-up.
• A deposit. Paying part from reserves reduces every repayment.
• Fees. Ask for arrangement and early-repayment charges. Under the Growth Guarantee Scheme, upfront fees including broker fees are limited to a maximum of 5%.
• Cash-basis accounts. A bank could ask for accounts on the traditional basis before agreeing a loan.

The effect of a deposit

Paying part of the cost from reserves cuts every repayment. Using the same assumptions, a 20% deposit (£12,000) leaves a £48,000 loan. At an assumed 9% over seven years the monthly payment falls from about £965 to about £772, which moves the net annual cash flow from £-2,084 to +£233. The deposit has its own cost, because that cash is no longer available to the business, so weigh it against what the same money would earn or protect elsewhere. A deposit also reduces the borrowing a lender has to underwrite, which can help when security is thin.

Payback is a separate question

Simple payback on the example is £60,000 divided by £9,500, or about 6.3 years, before tax relief, and it is the same however the system is funded. The cash-flow test asks something different: whether you can carry the repayments while the system pays back. A project can have a fine payback and a poor cash-flow profile on a short loan, or the reverse. To work out the repayment yourself first, see how to calculate a solar loan repayment. Look at both, and use the finance calculator to test your own figures.

Questions to ask before you accept an offer

• What is the total amount repayable over the whole term, in pounds, not just the rate?
• Is the rate fixed for the whole term or variable? A variable rate follows the lender’s response to Bank of England decisions, so the table above would move.
• Are there arrangement, broker or early-repayment fees? Ask for each in writing.
• Is there a charge over business assets, a personal guarantee, or both, and when does each fall away?
• Does the lender require the installer to be a particular type of firm or the system to carry a particular certificate? Ask before you sign a supplier contract.
• What happens to the loan if you sell the premises or the business before the term ends?

When a loan is the wrong shape

If the net cash flow is negative at every term you can get, or the lender wants security you will not give, consider routes that carry the payment differently: hire purchase, an operating lease, or an arrangement with no upfront cost. The right answer depends on your tax position and how long you will occupy the building; our funding routes comparison sets the routes against each other. The general loan questions, including what "green" means for a lender, are in the guide to a green loan for small business.

For a lender-by-lender view of the loan route itself, including security and what a bank asks for, see business solar loan finance.