The oil and gas industry is a diverse—and expensive—business to get started in. While these companies are responsible for finding solutions to climate change and discovering new sources of energy, all of that exploration comes at a price. Keep reading to learn more about oil and gas financing.
Whether you’re involved in excavating, fracking, pipeline construction, oilfield services, or other roles in the energy sector, you’ll need capital to get your business off the ground and help it grow over time.
How Financing Can Help Your Oil and Gas Business
Projects in the oil and gas sector can be lengthy, and payment on invoices could be months, if not years, down the road. That can negatively impact cash flow.
Financing for gas and oil companies can help with a number of expenses, from ensuring that you meet regulatory approval requirements to drilling to paying for equipment you need, whether you’re in the downstream, midstream, or upstream oil sector.
It can also help with simple overhead expenses such as payroll and office supplies. Bottom line: financing ensures that you have the capital you need to get your business running as well as keep it chugging right along.
Types of Financing Options for Oil and Gas Companies
Now let’s explore your options for financing. Each has its own advantages and disadvantages. The higher your credit rating, the better the interest rate you will qualify for.
The Small Business Administration offers what are typically the lowest interest rates of all financing options. Its 7(a) loan program can be used for working capital, commercial real estate, and equipment, among other things.
Another great place to get low interest rates on oil and gas financing is through banks, credit unions, and some online lenders. Be aware that most of these lenders require you to be in business for at least two years and have a good credit history.
Line of Credit
Sometimes you need some cash now and more later, and that’s where a business line of credit is handy. You can borrow against your line of credit, repay, and borrow it again.
If you need to purchase oil rigs or other types of equipment for your oil and gas business, an equipment loan could be useful. The equipment you’re purchasing acts as your collateral, and you may be able to get good interest rates.
Invoice Factoring or Financing
Another option to get access to cash is invoice financing or factoring. With invoice financing, you are lent funds based on the value of outstanding receivables. Once you receive payment on those invoices, you pay back the loan plus fees. With factoring, you sell your invoices, and it’s the factoring company that is responsible for getting the invoice paid.
Using business credit cards can help you make purchases for business, such as office supplies or gas for company vehicles. There are many cards that offer rewards programs that let you earn points for purchases that you can then redeem for travel, cash back, and other perks. Be aware that many credit cards charge high interest rates.
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If you have bad credit, you can still get financing with short-term loans. These lenders look at other factors besides credit scores, such as annual revenues or outstanding invoices. These do, however, typically have short repayment periods and high rates.
When to Get Financing for Your Oil and Gas Company
While it might seem counterintuitive, the best time to get financing for your oil or natural gas company is before you need it. Waiting until you’ve got a backlog of gas projects and no working capital available may make it hard for you to get a loan.
Also, if your credit isn’t good, consider waiting to apply for financing and spend time building up your credit. Doing so could enable you to qualify for better pricing and pay lower interest rates.
Whether your credit scores are excellent or poor, plan ahead for your financing needs so you don’t wait until you’re desperate for the cash and have fewer options available to you.
How to Qualify for Oil and Gas Financing
Whether you’re in the renewable energy sector or build pipelines, lenders will look at the same requirements for loans.
The first is how long you’ve been in business. Lenders don’t want to give money to a startup business that hasn’t had time to prove its stability. Most will require you to be in operation for at least two years, though some short-term lenders may accept less.
Another large qualification factor is your credit. Both your personal and business credit may be looked at to determine whether your company is eligible for financing or not. The better your scores, the lower the rates you may qualify for.
Your company may not have its own credit history, and if that’s the case, spend some time learning how to establish business credit.
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How to Apply for Oil and Gas Financing
Some loan applications can be completed in a few minutes while others, particularly those with banks, credit unions, or the SBA, may take longer and require more paperwork.
You’ll be asked details about your business including company name, address, how long it’s been in business, and annual revenues. You may also be asked for personal details such as your contact information and Social Security number.
The loan application will also ask how much you want to borrow and what you plan to do with the funds.
Upon credit approval, you will be presented with your loan options, including repayment period and interest rate. Review the loan terms and sign the loan agreement, and funds should be deposited into your bank account within a few days.
How Nav Can Help
Small business loans can help energy companies like yours withstand the volatility of the ebbs and flows of the market. Nav can help you find financing solutions that suit your needs. Check out your options to get started.
This article was originally written on May 7, 2021 and updated on September 8, 2022.
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