Green loan vs capital purchase — UK commercial solar 2026
Both green loan and capital purchase keep the solar asset on your balance sheet and let you capture the FYA tax allowance. The difference is just timing — pay capex upfront (capital purchase) or spread it over 7-10 years with interest (green loan). The right answer depends on what your capital is worth elsewhere.
Headline answer
Capital purchase wins on lifetime cost — by the cost of the loan interest, typically £45-65k extra over 7-10 years on a £200k system. Green loan wins where capital deployed in solar would otherwise earn higher returns elsewhere, or where working capital preservation has strategic value beyond the interest cost.
Side-by-side
| Criterion | Green loan | Capital purchase |
|---|---|---|
| Upfront capex | £200k | £0 (financed) |
| Monthly payment | None | £3,019 over 84 months (7-year term, 7% APR) |
| Total payments | £200k | £253,596 over 7 years |
| Interest cost | £0 | £53,596 over 7 years |
| FYA capture | Year 1 — £25k tax saving | Year 1 — £25k tax saving (lessee captures) |
| Tax-deductibility of interest | N/A | Yes — interest is tax-deductible operating expense |
| Net interest cost (after tax) | £0 | ~£40k over 7 years (after 25% corp tax saving on interest) |
| 25-year cumulative cash benefit | £1.05m | £999k |
| Lifetime cost premium vs capital | Baseline | £45-65k more |
| Best for | Companies with available capital not earning >7% elsewhere | Companies preserving capital for higher-return investments |
Which one for which situation
What return would the £200k generate if invested elsewhere in your business?
If your capital can earn more than the green loan rate (after-tax) elsewhere — typically 8%+ in your operating business — green loan wins because the spread compounds in your favour. If alternative capital deployment earns less than 5% (e.g. cash savings, money market), capital purchase wins because solar offers higher effective return than the alternative.
Is working capital preservation strategically valuable beyond the interest cost?
For growing businesses heading into strategic investment cycles (acquisition, expansion, equipment refresh), preserving £200k of working capital may be worth the £40-60k interest premium. For mature businesses with stable capital position, the interest cost is dead weight.
Does your bank covenant package penalise additional debt?
Some loan covenants restrict total debt-to-EBITDA ratios. Adding £200k of green loan debt may breach restrictive covenants on tightly-leveraged businesses. Capital purchase avoids the covenant issue. Check your facility documentation before assuming green loan is straightforward.
Is the project FYA-capturable in the relevant period?
Both structures capture FYA the same way (the borrower / buyer holds title and claims the allowance). Don't use this as a deciding factor — both are equivalent on FYA. Use cost of capital and working capital priorities instead.
Green loan vs Capital purchase FAQs
Is green loan interest tax-deductible?
Can I prepay the green loan early?
Is the FYA tax saving the same on green loan as capital purchase?
What's the typical green loan rate for commercial solar in 2026?
Can I combine green loan with another structure?
Related comparisons and finance pages
Borrowing to buy vs buying outright: key differences
A green loan and a capital purchase both result in your business owning the solar installation — the difference is whether you use your own cash reserves or borrowed funds. Both routes unlock the same tax benefits (Annual Investment Allowance, SEG income), but they have very different implications for cash flow, working capital, and opportunity cost.
The decision is essentially a capital allocation question: is the after-tax cost of borrowing greater or less than the return you could generate by deploying that cash elsewhere in the business?
Capital purchase: maximum long-term return
Paying cash for a solar installation means no interest costs, no debt on the balance sheet, and the full benefit of AIA tax relief in year one. For a £250,000 system, a 25% Corporation Tax rate delivers a £62,500 tax saving — meaning the effective net cost after tax is just £187,500.
Capital purchase advantages
No interest cost, balance sheet stays clean, full AIA year 1, maximum long-term ROI (no finance charges eroding returns), simple and fast procurement.
Capital purchase disadvantages
Large working capital requirement, opportunity cost of cash deployed (could be used for core business investment), cash flow impact in year of purchase even with AIA relief.
Capital purchase ROI profile
Typical 100–250kWp commercial system achieves payback in 5–7 years on a cash purchase basis, with returns of 12–18% IRR over 25-year system life.
Green loan: preserve capital, spread cost
A green loan lets you install solar now while keeping working capital available for core business needs. You repay the loan over 5–10 years from the energy savings the system generates — in many cases achieving cash flow positivity from month one.
Green loan advantages
Preserves working capital and liquidity, cash flow positive from early in the loan term (energy savings exceed repayments), AIA still available in year 1, interest is tax-deductible.
Green loan disadvantages
Interest cost (typically 5.5–9% APR) reduces long-term ROI, debt appears on balance sheet, approval process takes 2–4 weeks, potential impact on credit facilities.
Green loan ROI profile
After interest costs, a green loan typically delivers 10–15% IRR over 25 years — still excellent, but lower than a cash purchase by the cost of finance.
The AIA benefit is equal for both routes
A common misconception is that AIA only applies to cash purchases. This is incorrect. The Annual Investment Allowance applies to the cost of the asset regardless of how you financed it, as long as your business owns it. Both capital purchase and green loan buyers receive the same 100% first-year tax deduction on up to £1m of qualifying plant and machinery.
| Tax calculation | Capital Purchase | Green Loan |
|---|---|---|
| System cost | £250,000 | £250,000 |
| AIA deduction (year 1) | £250,000 | £250,000 |
| Corporation Tax saving (25%) | £62,500 | £62,500 |
| Effective net cost after AIA | £187,500 | £187,500 + interest cost |
| Interest cost (7% over 7yr) | £0 | ~£63,000 total interest |
| Total 7-year cost | £187,500 | ~£250,500 |
| Annual saving (£28,000/yr) | £196,000 over 7 yrs | £196,000 over 7 yrs |
| Net position at year 7 | £8,500 positive | ~-£54,500 (before AIA offset) |
Cash flow comparison by year
| Year | Capital Purchase net cash | Green Loan net cash |
|---|---|---|
| Year 1 | Net of AIA saving (-£187,500) + £28,000 energy saving = -£159,500 | £0 capex + £28,000 saving less £28,000 repayment = ~£0 |
| Year 2 | £28,560 (full saving retained) | £29,120 less £28,000 = +£1,120 |
| Year 5 | £30,100 | £32,000 less £28,000 = +£4,000 |
| Year 8 | £31,800 (loan repaid for loan route) | £33,600 (full saving retained) |
| Year 15 | £35,200 | £37,000 |
| Cumulative 20yr | ~£620,000 saved | ~£540,000 saved (after interest) |
Capital purchase wins on total return. Green loan wins on year-1 to year-7 cash flow. The crossover point is around year 8–10 depending on interest rate and energy price inflation.
Decision framework
Choose capital purchase if
You have available cash with no higher-return use, you want maximum long-term ROI, your business is profitable and will benefit fully from AIA in year 1, or you want to keep the balance sheet clean.
Choose green loan if
Working capital is needed for growth, hiring, or equipment, your core business generates returns above 7–9%, you want positive cash flow from day one, or you prefer to spread financial risk.
Hybrid approach
Some businesses finance 50–70% with a green loan and contribute 30–50% as a partial capital purchase. This reduces interest cost while preserving meaningful cash reserves — often the optimal middle ground.
Need this comparison run on your specific numbers?
We model both structures side-by-side using your postcode, half-hourly demand profile, accounting position, and balance sheet preferences. Five working days from enquiry to indicative comparison.
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