SolarCity's (NASDAQ:SCTY) very existence is built on the idea of democratizing solar energy -- making it possible for everyone to generate their own electricity instead of just buying it from a utility. The company has done that by making installation and financing of solar systems on residential rooftops easy to understand, and has signed up hundreds of thousands of customers in the process.

Now, CEO Lyndon Rive wants to lower the credit threshold his company is willing to accept when signing up customers to 20-year solar agreements. Currently, it won't accept anyone with lower than a 650 credit score, but Rive wants to lower that further, potentially offset by a down payment, expanding the company's potential market. But this puts a further spotlight on the company's recent challenges attracting new customers, and brings to the forefront and even bigger question: Is SolarCity a solar company or a bank?

Solarcity Rooftop Solar Installers

Image: SolarCity.

Why SolarCity needs more customers
To understand why SolarCity would want to lower its credit threshold we need to understand the challenges SolarCity currently faces today. The company has been having a harder time selling solar systems lately, as indicated by a 60% rise in sales costs per watt over the last two years to $0.64 in the third quarter and a massive reduction in growth to just 40% next year (the company has doubled annually for the last five years). It's worth noting that competitor Sunrun (NASDAQ:RUN) also has sales costs of $0.61 per watt, so high costs to acquire customers aren't unique to SolarCity.

In theory, focusing less on growth will allow SolarCity to more efficiently sell solar to a more select group of customers. On its conference call, management even made reference to each extra MW of sales each quarter being harder and harder to achieve, so slower growth would hopefully bring down sales costs.

But if the company has to expand its pool of buyers to a lower credit, higher risk customer, it undermines this idea that sales costs are only rising because growth targets were too high. Maybe sales in general are becoming harder as the market becomes more saturated, and that's why SolarCity needs to expand who it sells to.

SolarCity is becoming a bank
This might not be a big deal if SolarCity just built and sold solar systems, but the company is actually more of a bank than an installer these days. SolarCity had 298,030 paying customers at the end of the third quarter who it counts on to pay leases or power purchase agreements each month. The higher the credit score of these customers, the more likely they are to pay that obligation (just like in banking).  

So, moving below the 650 threshold would increase the risk of customers not paying bills as planned. It's worth noting that below about a 650 credit score is where a bank considers a borrower subprime, something short seller Jim Chanos has called SolarCity in the past.

The data also shows that lower credit scores increase business risk for solar installers. According to Sunrun's most recent earnings report, prime mortgage and auto loan providers experience a roughly 1-2% loss rate on loans, higher than the less-than-1% rate at Sunrun. But subprime auto loan providers Santander and AmeriCredit expect around a 15% loss rate with customers who have 575 and 600 credit scores respectively. That's the direction SolarCity sounds like it wants to go in.

Sunrun Credit Profile

Image: Sunrun earnings presentation.

Is this a path to growth or a sign of desperation at SolarCity?
The biggest reason I could see that SolarCity would want to lower the credit requirements of customers is if it can't find enough customers with good credit who want to go solar to hit its growth targets. That's the concern that came out of rising sales costs and slower growth targets in the third quarter earnings report, and this only exacerbates my concern.

SolarCity could offset some of the risk with a down payment, but over the 20-year term of a lease or PPA a lower credit score still brings a lot of risk into the business model. SolarCity could alleviate some of this risk by focusing on selling systems or partnering with a bank to do the loans. As it is, SolarCity becomes more and more of a bank everyday, and moving into subprime customers should be alarming for shareholders who hope the company can count on homeowners as counter parties for 20 or 30 years of cash flows.

It's also possible I'm looking too much at the risk and not enough at the opportunity. Long-term, the jury is still out on how much value SolarCity's business model adds and there are strong arguments on both sides of the debate. SolarCity is a pick in several Motley Fool Premium services and there is a bull case to be made around the company's industry-disrupting business model and value proposition to customers. I obviously have my doubts, but having open debates and differences of opinion are what investing, and Foolishness, are all about.

Travis Hoium has no position in any stocks mentioned. The Motley Fool owns shares of and recommends SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.