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Solar funding options for businesses in South Africa – EQ Mag
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Solar funding options for businesses in South Africa – EQ Mag

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There are many funding options available for rooftop solar, as many South Africans try to escape Eskom’s embattled power supply.

During the budget speech, Finance Minister Enoch Godongwana said that businesses would be able to reduce their taxable income by 125% of the cost of investment in renewables.

He added that the government would guarantee solar-related loans for small and medium-sized businesses for a 20% first-loss bases. This means that government will carry 20% of the loss on defaulted loans, with institutional lenders not having to carry the entire loss.

The government hopes that this will incentivise businesses to invest in self-generated renewable energy.

However, the initial capital costs will likely be exclusionary without funding assistance, and lending institutions will have a crucial role in helping businesses install and operate rooftop solar.

That being said, lending institutions often require security for loans to be advanced if a borrower defaults under a loan agreement.

The government will guarantee 20% of the defaulted loans without additional security, but lenders will likely not be able to recover the money borrowed in the loan agreement.

Thus to assess the appropriate security, the circumstances of the borrower must be assessed in order to find the best security that will be provided to the lender in a funding arrangement.

Mashudu Mphafudi and Michael Bailey at Cliffe Dekker Hofmyer looked at securities that lenders should consider when advancing loans for rooftop solar.

Although their analysis looks mainly at lenders, the securities listed also give valuable information to borrowers.

Special notarial bond

A special notarial bond comprises real security in the mortgaged property as if it had been expressly pledged and delivered to the holder of the right.

“A special notarial bond for tangible movable property must identify and describe the rooftop solar secured in a manner that makes the rooftop solar readily recognisable,” Mphafudi and Bailey said.

The special notarial bond must also meet the requirements in the Security by Means of Movable Property Act 57 of 1993.

Normally, rooftop solar installation will occur after the lender advances the necessary funds to the borrower.

Therefore, the special notarial bond can only be registered when the installation of the rooftop solar is completed.

If the borrower fails to meet the obligations under the loan agreement, the lender may sell the property without approaching the court for an order to that effect.

In addition, the lender is seen as a secured creditor, meaning that no other creditor may attach the property as a security.

However, if the solar is not properly identified, the lender will be seen as the concurrent creditor on the insolvency of the borrower – meaning that they do not have any security for their claims.

General notarial bond

A general material bond is a mortgage by the borrower of all of its tangible movable property in favour of the lender as security for a debt.

However, in the absence of attachment of the property, the lender is not a secured creditor of the borrower in a general notarial bond.

It is a means for the lender to obtain a limited statutory preference over the claims of concurrent creditors if the borrower’s estate faces insolvency.

Guarantee or suretyship

“Guarantees and suretyships are a form of security for a principal obligation i.e. the due performance of the borrower for, inter alia, the repayment of the loan,” Mphafudi and Bailey said.

Acquiring a guarantee or suretyship needs to consider the assets or balance sheet of the individual or company, respectively. This will ensure that the enforcement of the guarantee or suretyship can cover the loan’s outstanding balance.

Cession in security

An agreement between the borrower and lender where the borrower grants the security over an intangible movable property in favour of the lender.

The lender can consider a cession in security over their bank accounts. The businesses’ bank accounts will still be maintained by the borrower and all amounts standing to the credit of the accounts will be ceded.

Moreover, rooftop solar needs to be constructed and will be used by the borrower to meet their electricity demands or provide a revenue source. The project documents can thus be ceded and depend on the borrower’s business and what the solar is used for.

The borrower could also cede all book debts, claims or receivables – whether in contract, delict or otherwise – to the lender.

Shareholder pledge and cession

The installation of solar benefits the shareholders of the borrower.

Therefore, lenders could consider the pledge and cession of all the share capital held in the borrower and other claims that shareholders may have against the borrower.

Additional security

The lender could consider a hire purchase transaction, giving the lessee the option to purchase the rooftop solar for a set amount until the end of the lease period.

An instalment sale can also be agreed upon where the borrower has possession of the rooftop solar, but the title of the rooftop solar is kept with the lender until the full payment of the purchase price.

Mphafudi and Bailey said that there is a major risk regarding the lender taking the title from the supplier of the rooftop solar.

Concluding remarks

Mphafudi and Bailey added that a lender should consider a special notarial bond for smaller rooftop projects that will be completed within one year of the advancement of the loan.

Whereas with larger rooftop solar projects where construction will take more than a year from the advancement of the loan, the lender should get a general notarial bond until a special notarial bond is registered.

The government may have introduced beneficial tax brakes and slight guarantees, but a lender must search for the best way to protect the entire loaned amount.

Source: businesstech