Solfácil, a Brazilian fintech that provides credit lines for installing solar energy, announced on Wednesday that it has raised a $30 million Series B funding round led by US-based venture capital fund QED Investors. The round also had the participation of Valor Capital Group, which in July last year led the company’s BRL 21 million Series A funding.
The proceeds will be used in technology development, to expand and launch new credit products, such as a solar line focused on agribusiness, and to double the network of integrator partners (contractors who actually design and build solar panel projects) to 10,000.
In an interview with LABS, the CEO and co-founder at Solfácil, Fábio Carrara, said that making a minority dilution in the company’s equity with a Series B was something decided in March this year, and the process closed in two months. Although Solfácil has already reached breakeven, with revenue growing faster than fixed costs, Carrara wanted to choose QED as a partner because it is a global fund specializing in fintechs.
“In Latin America, they have already invested in six of the ten unicorn fintechs. In a way, QED has already worked with almost all the financial services aspects that we have within our operation, such as credit for individuals, credit for businesses, access to capital markets, securitization […] The round came not because we needed [money], but to take advantage of this opportunity to do something even better.”
Furthermore, for Carrara, the time to invest in solar energy in Brazil is now. Facing the lack of energy production capacity because of the water crisis the country is going through, the entrepreneur says: “If last year Brazil had invested more in solar energy, we wouldn’t be suffering now […] Unlike rain, which has dry periods, the sun shines all year round in Brazil, and the Brazilian consumer is playing this fundamental role of taking his own capital to finance [solar energy projects] in a private institution, investing in infrastructure, which is good for him and the whole country.”
Brazil faces a risk of energy rationing due to the worst drought in almost a century, which has damaged the production of hydroelectric plants. This has caused the country to turn on all the fossil thermoelectric plants available. Brazil also started importing electricity from its neighbors Paraguay, Argentina, and Uruguay.
On the other hand, it has great potential for photovoltaic energy. In 2020, the country joined the list of the ten countries that have installed the most solar energy globally, according to data from the International Energy Agency (IEA) compiled by the Brazilian Solar Energy Association (Absolar, in Portuguese). Since 2012, the modality has installed about 5.8 gigawatts (GW) of operational power, according to the entity.
Recently, Brazil surpassed the mark of 500,000 connections of its own energy generation from solar photovoltaic sources. According to the association, the energy produced by solar panels on rooftops and small plots of land is today a tool to reduce the demand for electricity during peak hours.
For Absolar and other agents in the sector calling for a vote on the Legal Framework for Self-Generation of Solar Energy, the legislation – which is on hold in the plenary session of Brazil‘s House of Representatives – could help alleviate the impact of the water crisis. On the other hand, the text establishes that companies and households with their own energy generators would not pay all the costs of the electric system, fees that would become subsidies for the reduction of energy costs for low-income people.
Amid this debate, Solfácil wants to make solar energy more accessible to Brazilians. The fintech has partnerships with 5,000 companies that install solar energy projects and finance the customer to buy the system from that company. In this financing process, the fintech not only evaluates the credit risk but also the project proposed by the company to the customer. Solfácil started offering credit lines only for individuals, but late last year launched financing for small businesses and now intends to reach farmers.
How Solfácil wants to make solar energy more affordable for Brazilians
Solfácil financing has payment terms of 10 years and six months grace period with a rate of 1.2% per month. According to Carrara, much of the market is long-term financing because most Brazilians don’t have enough money to invest in solar energy all at once and need credit to pay for the investment in installments. Doing this every month is also generally cheaper than paying a regular electricity bill.
“We did something quite challenging: convincing the capital market to invest and wait ten years to have all the amortization because this was crucial to make it viable for customers to exchange the cost of the [monthly electricity] bill for an investment in a solar energy system.”
But all this financing creates working capital pressure on the companies that install the solar panels as they give customers terms to pay in installments while they pay for the equipment in full. For this reason, Carrara said that Solfácil will create a special line of credit for integrator partner companies so they can anticipate amounts they will receive from customers’ installments to pay their suppliers.
“It is a line for the integrator to split the project’s payment from three to six times without interests. He bears the eventual working capital cost, and we anticipate this money immediately to so that he can pay his equipment supplier.”
Carrara does not disclose the interest rate built into the credit line for integrators but explains that the model is similar to the credit card anticipation that already exists in Brazil and the Buy Now Pay Later model that grants microcredit for payments in installments.
“When you buy a sneaker in installments without interest, the truth is that most retailers are anticipating this flow. So [our model] will be similar; it’s one more option for our integrator. If he has the solidity to bear this working capital, it is better for him. But if he thinks that our line of credit can help reduce the pressure to make more sales to pay the turnover of that other operation, it is another alternative that we want to give to the market. [This way] he can really focus on what he knows, which is to sell the system and execute the technical project.”
According to Carrara, for the customer, the idea is that the solar energy system generates a return to the point of repaying the financing. “We have the differential of doing credit in solar because we already understand the asset. Unlike the financial institutions that know how to evaluate people’s risks, we know how to guarantee a good project for the final consumer. This is very important because, in the end, the solar energy project is paid with the savings that the system itself generates.”
Last year, with Brazil‘s benchmark interest rate at 2.25% per month, Carrara said that the solar energy system could generate a return of more than ten times the yield of a traditional saving account in Brazil.
The lower the interest rate, the more the capital market looks for alternatives. But recently, the Brazilian Central Bank raised the benchmark interest rate to 4.25%. Carrara states that these changes were already expected and do not harm the company’s operation. “Today, our securitization is done [taking into account] the benchmark interest rate and the IPCA [the official inflation index in Brazil], which has also been increasing. But these levels are still quite comfortable because we pay relatively more than the interest rate. We knew this correction movement would come.”
“One of the implications of this is that we could not afford the luxury that typically financial institutions in Brazil afford, which is to have high default rates. There is no alternative for us. Either we generate credit with quality so that we don’t have to charge [the cost of] default from good payers, or there will be no credit. It is a challenge, but we like this challenge because there is nobody better than us to do this. We understand solar energy, and we have created a credit origination machine that has a very different approach than the whole market has to ensure quality.”
Solfácil accesses money for credit financing in capital markets by selling debentures that the company issues in the market. For the lines aimed at individuals and companies, the startup raises money in the market through the green FIDC (a type of fund composed of receivables of different kinds of issuers widely used in the Brazilian credit market) that it has launched.
But for the line focused on agribusiness, Carrara says there is the possibility of raising credit through other instruments, such as Certificates of Agribusiness Receivables (CRA), which are fixed-income securities backed by receivables originated from businesses between rural producers. “It is an incentivized line. It doesn’t change much for the consumer, but it is a market funding that can give more efficiency to this operation.”
The difference between the credit offered by Solfácil for companies, individuals, and agribusinesses is in the ticket: for individuals, the line is up to BRL 200,000, and for small entrepreneurs, Solfácil finances up to BRL 500,000. For farmers, the funding ceiling has not yet been defined. “We are discussing some points, but it is a market that typically needs more grace period because the rural producer relies on the harvest, has an irregular working capital. It is important to give a grace period so that he can have a crop to pay during this period. We are discussing how to match amortization with crops and the securitization itself.”
Carrara says that the startup has grown about 20 times in volume of loans granted in the last year, originating BRL 60 million per month. From 30 people last year, the team has grown to 200 employees and should end 2022 with 460.
Solfácil expects to finance BRL 1 billion in 2021 and BRL 2.5 billion in 2022. “This year will be another year of almost 10-fold growth, much of it due to the launch of the business line and the rural line. The solar energy market is countercyclical; when the economy is doing badly, it grows because people think about reducing consumption and expenses [in this case, the electricity bill]”.