It is no secret in today’s stormy economy… cash flow is tight in businesses and organizations. For many, it has been a downward spiral of spending more on operations and being further unable to upgrade systems. However, there are ways to “turn the ship around” and head out of the storm. Although cash flow constraints delay about a third of good energy management projects from getting implemented, this article describes financing mechanisms that can allow your projects to get implemented…now. Plus, at the end of the article is a link to a free webinar that will show you much more. This free webinar was part of a paid webinar series in 2010 and has over an hour of useful financing information.
If your company doesn’t have the upfront capital to fund an energy project, you could finance the project (just like your home mortgage) so that the implementation costs are spread out over time and this cost per year is less than your savings cash flow. Financing does not have to be complicated. In fact, financing energy efficiency/green projects can be very similar to your mortgage or car payment with fixed payments for a length of time. The bigdifference is that your car will not “save” you money like an energy project, which might have a 25 percent return on investment. Even if you pay 15 percent interest, you are still saving more money than the finance payments, which means the project becomes “cash flow positive” and does not impact the capital budget. This can allow your CFO to move forward without sacrificing any other budget line item. Unfortunately, when presented with financing options, a common reaction is to hesitate as people don’t like to enter into long-term contracts or pay an additional financing cost to a lender. However, with many energy management projects, the cost of financing is usually less than the cost of delay. Plus, if you do finance the project, the simple payback is effectively zero.
Table 1 below shows the cash flow for a non-financed project. Assume the project costs $100,000 and saves $28,000 per year for 15 years. This project could get approved IF the client has $100,000 in cash to fund it. The project has a Net Present Value of $ 102,700 and an Internal Rate of Return of 27 percent.