Traditional and Non Traditional Financing Sources

Traditional lending sources consider traditional risks using traditional financial vehicles, such as leases, loans, and mortgages. Conventional financial instruments usually have a payment schedule based on a pre-agreed term and interest rate. Interest rates may be fixed or variable, with both usually tied to one or more indices of money rates, which are uniformly reported by financial press. Floating rates generally key off of the London Interbank Offer Rate (LIBOR) and fixed rates off of U.S. Treasury Instruments, each with a term equal to the average life of the loan being considered. Conventional financing sources are risk adverse, meaning greater risk will demand greater reward in the form of higher financing rates. The cost of debt will be largely dependent on the amount of cash flow coverage the project provides and the strength of the balance sheet.

Conventional lenders may or may not factor in, understand, or care about the relative impact of project performance risk. The universe of banks that will even undertake any form of asset-backed or project financing is small. Some ESCos or project teams, which consist of a combination of an ESCo and a conventional lender, fully understand both credit and project performance risk and factor both into the ultimate cost of financing.

Non-traditional sources accept higher risk and may use non-traditional financing vehicles, such as shared savings and other energy service agreements. Other types of non-traditional sources include state government or utility-backed financing instruments. Financing is made available from these sources for projects in order to help accomplish other objectives, such as business retention.

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