Choosing the Right Financing 63turing, consider the following question: “Which is the better finance of-
fering, 0% or 6%?” Most people say “0%” until they find out that the 0%
obligation must be repaid in 6 months, while the 6% obligation has a term
of 5 years, making cash flow the deciding factor. The question is further
complicated when the 6% obligation requires that the owner(s) person-
ally guarantee the financing; however, the transaction can be done at 12%
without a personal guarantee. Once all of the terms and conditions are
known, it is easier to understand why many would prefer to pay a 12%
financing interest rate rather than 0%. In addition to the term and per-
sonal guarantees, the list of structuring points is broad and may include
whether the rate is fixed or variable, payment schedules, down payments,
balloon payments, balance sheet impact, tax treatment, senior or subordi-
nated debt, and whether additional collateral is required.
Your organization’s legal structure, size, credit rating, time in busi-
ness, sources of income, and profitability or cash flow are also important
considerations when choosing the right financing vehicle and source of
funds. The type of project, general market conditions, dollar size of the
project, and the use of the equipment being financed are also important.
FINANCIAL INSTRUMENTS
There are two basic approaches to funding projects, “pay-as-you-go”
and “pay-as-you-use.” Pay-as-you-go means paying for the project out of
current revenues at the time of expenditure; in other words, paying cash.
If you don’t have the cash, the project gets postponed until you do. Pay-
as-you-use means borrowing to finance the expenditure, with debt service
payments being made from revenues generated during the useful life of the
project. Because energy efficiency projects generate operating savings over
the life of the project, the pay-as-you-use approach makes good sense.
As previously mentioned, public sector organizations can borrow at
tax-exempt rates, which are substantially lower than the taxable rates that
private sector organizations will pay when financing. While tax-exempt
financial instruments can only be used by public sector (and qualifying
non profit and private sector) organizations, taxable instruments can be
used by all. This section will help identify the financial instruments best
suited for public or private sector application. Public sector instruments
include bonds and tax-exempt lease purchase agreements. Private sector
instruments include a variety of commercial leases. All sectors can benefit