Other articles on pre-qualifying prospects for financing:
– How to Pre-Qualify a Commercial Customer for Financing
– How Different Financing Mechanisms Secure Their Risk: All About Liens

 

About Risk:
Investor risk is the fulcrum upon which borrowing/financing costs rise and fall for the borrower.

All of the different funding mechanisms available via CleanFi use different methodologies to assess and then secure risk.

It is the underwriter’s job to evaluate the risk of default by the borrower/off-taker.  This is more art than science, since the commercial sector does not yet have a black-and-white standard of credit evaluation such as a personal credit score. Underwriters use a matrix that is unique to each funder and mechanism, but all of them use common tools to varying degrees.

Credit-Based Lending vs. Project-Based Investing:

For any credit-based methods of financing a building improvement project, Debt Service Coverage Ratio (“DSCR”) will almost always be a key underwriting factor.  Specifically, those methods include equipment leases, capital leases, and loans.

Those financing mechanisms rarely take into account any operating cost savings brought by an energy improvement, unlike PPA investors or C-PACE funders, who analyse the merits of a project by assessing operating cost savings through energy efficiency/independence improvements to a building.

In contrast, pure credit-based lenders see whatever they are financing as a “machine” that the borrower has deemed important for their business that that hopefully will allow them to increase their bottom line.

So underwriters (application analysts who review applications) look to DSCR as a fundamental measurement of whether this particular borrower can afford to make the desired investment.

What is DSCR?

It measure the net income after all operational, sales and existing debt-financing costs have been paid.

It is measured as a ratio:
– total net revenue (revenue minus operating expense (before taxes and depreciation)
divided by
– principal & interest payments (usually over a year)

Desirable ratio:
Typically, underwriters look for between 1.15 (liberal) and 1.30 (conservative) as a DSCR for a successful applicant.

Example 1:

Let’s say a company makes a million dollars a year with operating expenses of $875,000 a year.

Net Revenue is $125,000 a year (after all operating and sales expenses).
It needs to borrow $1,000,000 for an improvement on which the annual payments will be $100,000 per year.

125,000/100,000 = 1.25 DSCR

This company is showing that it can still return a profit after it has fulfilled its prospective obligation on the new loan it is applying for.

Important notes and distinctions:

Underwriters look for consistency in annual revenues. They do not measure DSCR off of the last year’s revenue only, but as an average of the last three to five years of revenue.

Example 2:

Let’s say the same company had net revenue over the last three years of $100,000, $82,000, and $125,000.   Their average annual net revenue would be $102,300, which would make their DSCR 1.02.  This would fail to meet the underwriting test; it would be considered an excessively risky loan.

Not all underwriters use the averaging method, and not all underwriters use the same formula for getting to net revenue.  This article is intended to give an illustration of the process by which any given underwriter might calculate DSCR, but the specifics vary.

Some underwriters might use EBITDA as a determining factor for net revenue. Others might leave out existing debt servicing.

Funders adjust ratio to economic conditions:

DSCR is like sails and lines on a sail boat; depending on conditions, the DSCR is either tightened (higher ratio requirement) or loosened.  Favorable economic conditions in a growth sector will reduce the risk rating associated with a project loan in a corresponding sector.  Assuming two very similar credit profiles and DSCR’s applying for the same project financing needs at two different times in economic cycles, it is not unlikely that one might be extended financing in a rising economy while the other might be denied in more uncertain times.

Pre-qualify a client prior to developing a project:

A project developer might use their own CFO or outside accountant to help pre-qualify a client needing project financing before investing too much time on the design and engineering side.  Failing the capacity to do so, feel free to orient the client early to a CleanFi application so that we might perform that task for you.

The process described here is exactly the one that CleanFi follows in its preliminary underwriting of all the applications processed via CleanFi.com.  However, CleanFi’s advantage is our knowledge of specific underwriting biases for any given funder option in our results page.

That is why cleanfi.com is your virtual project finance department.
Need help? Call us at 877.301.7800 or support@cleanfi.com


©2026 – Philippe Hartley for CleanFi.com