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Creating a customer financing product as a climate startup

Offering customers financing can be a highly effective deployment strategy for climate technologies that have a high upfront cost, but generate savings in the long run. Moving from a traditional hardware sales model to offering customer financing will mean either (a) leasing/renting your product (i.e. hardware as a service) or (b) offering debt/credit financing to the customer with an interest rate and other related terms. Regardless of which option you chose, offering customer financing is a significant undertaking, so…we’re here to help!

Mairi Robertson is Director of Asset Financing at Ezra Climate, a debt platform for climate companies. We sat down with her to outline the process of getting a customer financing program off the ground, and what you should ask yourself before you embark on this journey.

What is customer financing?

The most common model of selling a hardware product to a customer is with a standard cash sale, where your customer pays upfront and owns the asset outright. Customer financing, in the form of either a lease or a loan, works differently.

In a lease model - which includes Hardware as a Service, rental, and subscription - the customer might never own the asset, but will be charged a recurring payment for access to it. The asset could be owned by either you or a third party, like an equipment leasing firm. Leases can end with the customer buying the product for some pre-agreed residual price, but not always.

With a loan, the customer secures financing from you (or a partner), and pays it back along with whatever agreed upon interest and fees. The product serves as collateral for the loan, and the customer will only fully own the product/asset once they’ve paid off the loan.

Why offer customer financing?

Climate technologies can be prohibitively expensive upfront, yet over the long term generate meaningful savings for customers - like residential solar that costs consumers tens of thousands to install, but save them money every month on electricity bills. By allowing consumers to spread the cost, you’ll remove this barrier to entry and attract more customers.

This is also true in contexts where your buyer may not be a person, but rather a small (or large business). While some of your commercial customers might have the means to buy your product upfront, a lot of them will prefer to buy as OpEx rather than CapEx given how they manage cash flow, etc. Offering financing as an option allows you to better align your offering with the demands of this segment, and improve your product market fit.

Who you’ll need to hire to run your customer financing program

If you decide to go down this route, you need people on your team who know how to build a new financial product. There’s three key competencies you’ll need to hire (or contract) for:

1. People who have what it takes to execute the Lease/Loan Operations
You’ll need people who understand credit risk and can design an underwriting policy, so you can define who you’re willing to lease or lend to. Plus, you’ll need people who know how to manage processes like collecting payments and onboarding customers on a week to week and month to month basis.

2. Financial product people
Designing the offering itself will take a lot of research and expertise, not least around figuring out whether your customers would prefer a lease or a loan. And if you move forward with a lease, you’ll need to figure out the finer points like what kind of monthly payments will be viable, and whether your customers will own the product at the end of the lease. People with a background in designing financial products will be pivotal here.

3. Capital markets experts
If you’re setting up a leasing or lending program, you’ll need separate/specialised capital to pay for the units you plan to lease or offer financing for. So, you’ll need someone on your team who understands capital markets, has the relationships to find you the financing you need, and can help you navigate the complexities of raising the right kind of facility for your business. Remember, even if you’ve spent a lot of time with equity term sheets (i.e. raising venture), off-balance sheet finance/warehouse facilities/etc are a totally different beast.

Three stages of establishing a customer financing program

1. The initial set-up
In this phase, you’ll design the financial product, which will involve rigorous customer research and rounds of customer testing, where you’ll get granular feedback over the course of 10-15 hour-long customer interviews.

You’ll also need to figure out your asset-level IRR and other unit economics, and get feedback from capital markets about whether those meet common thresholds for financing. Plus, you’ll need to set up the software you’ll use to manage your financing program, which can be a highly technical process - your systems need to give you recurring information about your asset performance over time, and integrate with your own finance system.

2. The implementation phase
In this stage, you need to raise the capital to finance your program. This will involve setting up a specialised asset-financing data room - this is meaningfully different from an equity data room, so spend some time understanding this difference and the questions that debt providers will have.

Then there’s the effort of actually going out and raising the capital, setting up an SPV if you need to, etc. You’ll also need to finalize the setup of your software systems so you’re ready for deployment as soon as the capital is in the door.

3. Launching your program
You don’t just hit send on your customer financing program, and that’s it done - you need to continually manage operations on a day to day basis. This scope of work includes customer service - managing enquiries and making sure installations/deployment are happening as promised - monitoring and reporting to your capital providers on how everything’s performing, and consistently making tweaks based on feedback.

Questions to ask yourself before you start down this path

1. Do you know how much it’ll cost?
Unless you’re already profitable, to pull this off you’ll need to raise money - not just for the leasing/financing component, but for your own business (i.e. equity), so you can build the team and the infrastructure tools you need. This alone will be a mammoth task - are you prepared for it?

2. Do you understand the challenges ahead?
A customer financing program is an incredibly complicated thing to establish, involving many levels of testing and iterating - it’s not a process that's ever done. You're essentially building a lending business in parallel to a hardware business, so think about it accordingly. Make sure you’re fully informed about what lies ahead and are truly up to the task.

3. Do you know whether to do a lease or a loan?
While commercial customers might prefer a lease, there’s often a psychological component to owning something that exists in your home, so a loan might make more sense for consumers. It’s imperative that you take the time to find out what your specific customers want from your specific technology.

There’s also the matter of regulatory requirements to consider, particularly with loans. For example, many consumer companies won’t launch their own programs, because that puts them in the realm of consumer finance regulation. With a lease model, while there’ll be some issues around compliance and regulation, things will be much simpler to navigate. Make sure you consider these factors before picking a path.

4. Are you going to scale enough for this to be worth it?
For setting up a leasing program to be worth the time investment - and to have a chance of securing the capital you need - you need conviction that you can scale meaningfully. This is why spending so much time on customer testing is incredibly important - you don't want to go down this route only to find that most of your customers were happy with cash sales after all.