Decision framework · Updated May 2026

Cash vs finance for commercial solar — the honest 2026 decision framework

A structured decision approach for UK businesses choosing between cash purchase, asset finance, operating lease and PPA for commercial solar. With worked examples that reflect 2026 economics — not 2018 pre-Full-Expensing maths.

The decision framework

Five questions, in order. Answer them in sequence and you'll land at the right finance route 90% of the time.

Q1: Are you a UK limited company subject to corporation tax with positive accounting profits?

• If yes: Full Expensing (100% year-one deduction, uncapped) is available. Go to Q2.
• If no (sole trader, partnership, LLP, loss-making, charity): AIA (capped £1m, all UK businesses) or operating lease. Skip to Q4.

Q2: What is your business's marginal return on cash deployed in core operations?

This is the key question that most commercial solar finance advice ignores. If your business genuinely earns 20%+ on marginal cash deployed (e.g. profitable manufacturer with backlog, growth-stage SaaS, well-established professional services with low capex needs), then financing solar at 8% creates positive carry — keep the cash for higher-return uses.

• Returns above 15%: prefer finance route (HP or asset finance with Full Expensing).
• Returns 8-15%: roughly indifferent. Choose based on balance sheet preference.
• Returns below 8%: cash purchase wins on after-tax economics.

Q3: What is your project size?

• Under £50k: HP is most common; PPA usually unavailable below this scale.
• £50k-£500k: All four routes available. HP + Full Expensing typically wins for tax-paying Ltd companies.
• £500k-£1m: HP, term loan, or PPA. Above £1m AIA cap binds for non-Ltd; Full Expensing essential for Ltd.
• £1m+: PPA, project finance debt, or balance sheet cash. AIA inapplicable; Full Expensing uncapped (Ltd only).

Q4: What's your property tenure?

• Freehold: All routes available.
• Long leasehold (15+ years remaining): All routes available.
• Leasehold 7-15 years: HP, cash or operating lease — PPA unlikely.
• Leasehold under 7 years: Cash or short HP only. Solar economics rarely work below 7 years remaining.

Q5: Do you have ESG / Scope 2 disclosure obligations that need off-balance-sheet treatment?

• If yes and you're FCA-listed or PE-backed: PPA or operating lease may be preferred for accounting reasons.
• If no: prefer the highest-IRR route from Q1-Q3 above.

Three worked examples

Example 1: Profitable Ltd company, £100k solar, 22% RoCE

• Q1: Ltd company with profits → Full Expensing available.
• Q2: 22% RoCE → finance route preferred.
• Q3: £100k → HP / asset finance fits.
• Q4: Freehold → all routes available.
• Q5: No specific accounting preference.
• Choice: HP with Full Expensing. Year-one tax saving £25,000 offsets early HP payments. 25-year IRR ~14%.

Example 2: Sole trader farm, £75k solar, 12% RoCE

• Q1: Sole trader → AIA available (not Full Expensing).
• Q2: 12% RoCE → roughly indifferent finance vs cash.
• Q3: £75k → all routes available.
• Q4: Freehold → all routes available.
• Q5: No specific obligation.
• Choice: HP with AIA at higher-rate IT (45%). AIA saves £33,750 — equivalent to ~5 years of HP payments. Net post-tax cost £41,250. 25-year IRR ~18%.

Example 3: PE-backed retailer, £4m multi-site rollout, ESG mandate

• Q1: Ltd company with profits → Full Expensing available.
• Q2: PE-owned with capital efficiency focus → finance route preferred.
• Q3: £4m → above AIA cap but Full Expensing uncapped.
• Q4: Mostly long-leasehold or freehold → PPA available.
• Q5: PE-backed Scope 2 disclosure pressure → off-balance-sheet preferred.
• Choice: PPA. Off-balance-sheet, no capex, immediate Scope 2 benefit, fixed energy cost for 20 years. 25-year IRR vs grid ~7% but capital preserved for higher-return uses.

FAQs

Cash vs finance FAQs

Should I pay cash or finance my solar?

Cash purchase delivers the highest internal rate of return — typically 14-22% over 25 years. But it ties up capex that might earn 15%+ in your core business. The right answer depends on (a) your business's marginal return on cash, (b) your tax position, (c) your appetite for balance sheet leverage, and (d) the project's IRR sensitivity to financing assumptions. For tax-paying businesses with strong core-business returns, asset finance + Full Expensing usually beats cash purchase on after-tax economics.

Which option gives the best year-one tax relief?

Cash purchase and hire purchase / asset finance both give 100% Full Expensing (limited companies) or AIA (all UK businesses) in year one — equivalent tax outcomes. Operating lease lets you claim only the lease rental as revenue expense (no first-year capital allowance). PPA gives no capital allowance (you're buying electricity, not the asset).

Does my balance sheet matter?

Increasingly yes. Banks, private equity sponsors and trade buyers scrutinise leverage ratios. PPA and operating lease keep solar off your balance sheet (subject to IFRS 16 / FRS 102 capitalisation rules). Cash and hire purchase put the asset and any liability on the balance sheet. For PE-backed businesses, off-balance-sheet finance is often preferred.

How do I decide between cash and finance?

Calculate your business's marginal return on cash (typically Cost of Equity or your hurdle rate). If your business returns 15%+ on cash deployed in core operations, financing solar at 8% interest creates positive arbitrage — finance it. If your business returns less than 8% on marginal cash deployed, cash buy wins.