Program design includes making some important decisions about the financing terms you will be able to offer. One goal is to standardize these terms, at least across a single state program, and hopefully across multiple state programs, to enable them to be packaged and resold on the secondary market. These financing terms include:
Interest rate — A lower interest rate can attract more participants, but program experience shows that the interest rate may not be the most important factor in increasing participation, and interest rate buy downs can be expensive. Understanding what the current market rates are for your target audience, as well as your cost of capital, will be important in setting the interest rate.
Administrative fees — What is required to fund this program on an ongoing basis? Programs can have an upfront fee, or can recoup costs by increasing the interest rate to cover expenses.
Maximum and minimum loan amounts — This will limit the types of activities that can be undertaken with your program.
Length of financing — The length of time allowed to repay the financing will influence the types of projects that are possible; comprehensive retrofits require longer terms.
Underwriting Criteria — Underwriting is the process of determining whether an applicant is credit worthy enough to receive financing. The traditional measures for evaluation are the applicant's debt-to-income ratio and credit rating score, used by the credit rating industry to represent credit worthiness based on bill payment histories, current debt, and other criteria. Proxies for credit such as a utility bill or a property tax bill payment history can also be used. One option is to include the energy savings on the income side when evaluating a borrower's credit using a debt-to-income ratio.
Security Interests — Many financing programs offer unsecured loans, where the borrower has not pledged any assets to the lender in the event the borrower defaults on the loan. Because of the risk that the lender will not receive repayment of the loan or collateral of sufficient value, unsecured loans carry higher interest rates than secured loans. Other programs, especially those with higher loan limits, tend to use some type of lien for security. A lien is a security interest in an item of property to secure the payment of a debt or some other obligation.
Additional incentives — State and local programs may also want to attract customers by "sweetening" the deal with additional incentives:
Rebates — A common way to enhance a financing program is by providing a direct payment for implementing certain measures to offset some of the project cost. These exist already in many states, and can be used to make the project more attractive (see www.dsireusa.org for existing programs in your state)
Subsidized transaction costs — Some programs offer free audits or additional information and support to walk a customer through the process.