The renewable energy sector continues to grow globally as a response to global warming. Driven forward by responsive governmental targets, heightened efforts to reduce pollution and greenhouse gas emissions, the sector is growing even faster than predicted.
Despite the current global pandemic and the major disruption that came with it, the sector has proven to be resilient and remains prosperous. As a result of its success, wind and solar are now becoming economically competitive in comparison to fossil fuels.
However, the declining costs and rising capacity within the renewable energy sector are creating a very competitive environment which can be hard to access for many. For this reason, bridging loans can help the renewable energy sector.
Costs such as product development, set-up and maintenance costs can prove costly and must be considered by almost everyone.
Due to its expense, the sector has traditionally been reliant on subsidies and incentives but can be hard to secure. Luckily, alternatives such as bridging loans are a solution for those looking to invest in the sector quickly.
What is a Bridging Loan?
A bridging loan (or ‘bridge’ loan) is a type of short-term loan. The name is about how it can help ‘bridge the gap’ and is useful for people wanting to borrow money for a short period typically lasting 3 – 12 months.
In comparison to other types of loans, requesting bridging loans is easier and usually completed within a fortnight.
This type of loan, sometimes known as temporary funding or swing loans is a unique type of loan which can provide immediate cash flow which may not be attainable otherwise. Nevertheless, caution is advised as with the nature of shorter-term finance it is often costlier than longer-term lending.
Bridging loans often involve high-interest rates, and collaterals are often a requirement. Seeking financial advice prior is advisable.
Types of Bridging Loans
There are two main types of bridging loan:
1. Closed bridge
This type of loan has a fixed repayment date and is generally granted when the borrower has a distinct extinct exit strategy. For example, it has exchanged some sort of contract but is waiting for completion, e.g. for a property sale.
Due to the clear finishing point, these loans generally have a lower interest rate than open bridging loans.
Lenders prefer this type of loan.
2. Open bridge
With this type of loan, there is no fixed repayment date. Borrowers tend to prefer this type of loan in instances where they are not confident that projected funds will be raised.
However, they come with greater risk and involve higher interest rates which are often dependent on the evidence of the borrower’s income.
Lenders will want to see a clear repayment strategy.
Bridging Loans for Investment in Renewable Energy
There are many ways to invest in renewable energy; almost everyone can do so, just a few examples are:
- Homeowners looking to reduce their carbon footprint can install solar panels on their homes and begin feeding they produce into the national grid.
- Farmers looking to reduce outgoing costs can install wind turbines and reduce running costs.
- Manufacturers can harness the power of biomass to both reduce their carbon footprint and produce heat and light for the factory.
All these green investment scenarios have something in common: the need for the initial investment.
Setting-up costs tend to add up and often include the purchase of equipment and installation. Capital returns are in no way automatic, and not everyone is in the financial position to invest without a loan. Bridging loans are oftentimes a valuable solution.
Bridging Loans for Renewable Energy Generation
In there most simple form, bridging loans are high-value short-term loans that are secured against the assets of the borrower.
Those looking to invest in renewable energy can benefit from the size and security of this type of loan with the speed and flexibility of personal lending. Bridging loans are advantageous in many ways.
- Purchases can be made quickly so borrowers can take advantage of opportunities when they arise, and it suits them. For example, a factory owner could install a biomass system when production rates are unexpectedly lower and use the electricity and save on running costs during busier periods.
- Bridging loans allow borrowers to raise capital in instances when cash flow is tight but have the assets to repay it comfortably. A farmer awaiting harvest season could use such a loan to install solar panels and begin producing electricity to gain extra capital for the farm.
- As a result of the competitiveness of the bridging loan market, interest rates are reduced, and you can reimburse a bridging loan as many times as possible.
Conclusion
Bridging loans seem to be a good option for the renewable energy sector because a solar or wind farm starts generating clean electricity and income right after being commisioned.
