Responsible Marketplace Lending — Indispensable for Commercial Solar’s Growth

The month of May saw some upheaval in the marketplace lending industry with the abrupt resignation of the CEO of leading peer-to-peer lending platform, Lending Club. The crisis has led to speculation regarding the viability of the broader marketplace lending business model. Critics cite high balance sheet risk, limited transparency, and insufficient federal regulation. However, just as SunEdison’s bankruptcy in no way reflects the health of the entire solar industry, the actions of the former Lending Club CEO have no bearing on the tremendous long-term potential of marketplace lending.

Marketplace lending is a revolutionary financial tool that can significantly reduce costs for borrowers and investors alike and unlock the capital required to allow burgeoning industries, such as solar, to reach their full potential. Like the broader financial industry, marketplace lending must maintain a robust system of checks and balances in order to function properly.

The commercial solar sector is one in which significant growth can be made possible by marketplace lending. Recent estimates demonstrate an upward trend in the solar industry, with a growth forecast of 119 percent amounting to a total of 16 GW of new installations by 2016 year end. What market reports often miss is that this growth is being driven primarily by residential and utility-scale solar installations.

The commercial solar sector, characterized by projects ranging from several kilowatts to several megawatts in size, has seen negative growth over the past few years. Despite a lack of growth, the commercial solar sector has enormous potential, with Wiser Capital anticipating a $67.5 billion investment in the northeast U.S. alone. This market opportunity has remained largely untapped due to a lack of available financing options. Here, the marketplace lending model provides an ideal solution.

Traditional sources of capital, such as large banks, have difficulty serving the commercial solar sector because of the complexities inherent in the transaction process. Project size and type vary significantly, resulting in unpredictability for lenders and high transaction costs. Limited by these high operating costs, banks often refrain from lending to projects under $10 million, as the high fees are not cost-effective given project size. The heterogeneous nature of commercial solar has resulted in a large number of potential solar projects being left without access to necessary capital.

Responsible and transparent marketplace lending in commercial solar breaks the barriers historically imposed by large institutions. Alternative lending platforms often offer increased efficiency and lower operational costs. For borrowers, automating many time-intensive processes can lower transaction costs by as much as 70 percent. This is particularly impactful for the solar industry because lower transaction costs and service fees enable a greater number of solar developers to receive financing and develop commercial projects that otherwise may not have been built.

Commercial solar will grow in tandem with marketplace lending platforms that deploy capital while remaining unwavering in their commitment to checks and balances and accurate information for all parties. By relying on alternative lenders that champion transparency and thorough due diligence, even investors with limited knowledge of solar may access high-quality, rated loans with long-term, predictable, and non-market correlated cash flows. As investors experience the ease, predictability, and transparency offered by marketplace lending in commercial solar, more capital will flow to the sector and its potential will be unleashed.

Lending Club’s recent tumult is simply an unfortunate bump in the road for the global marketplace lending community. All players should use the occasion to confirm and reconfirm that their underwriting practices consistently meet the highest standards. The financial innovation behind the marketplace lending model will undoubtedly continue to drive growth across industries. Commercial solar, like many other sectors, will prosper only with the support of a robust network of high-quality alternative financing options. The marketplace lending community must remain committed to excellence in transparency, accuracy, and checks and balances in order to prosper so that the sectors they support, like commercial solar, can prosper as well.

Lead image credit: Walmart | Flickr

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Graham Smith founded Open Energy with a vision to unlock the capital needed to drive growth in the commercial solar sector through innovative financial technology. Graham started his career in finance as a management consultant in London at Deloitte and Andersen Consulting before breaking into entrepreneurship with his first two startups: Axiom Global in 2004 and then Phoenix Partners Group in 2006. During his seven years co-running Phoenix, Graham started and managed Greekworks Capital, a renewable energy advisory business, and secured $75 million of construction finance for 15 MW of some of the United Kingdom’s first utility-scale solar projects.

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