Service companies in the oilfield industry need money to operate. From payroll to supplies to daily business expenses, having cash on hand is extremely necessary. However, consistent cash flow can be tricky when you have clients with extended payment terms. Because of this, it’s important to be familiar with financing options for oilfield service companies. We’ll explore some of the most common options in this guide.
Financing Options
Selecting the right financing solution requires understanding what’s available to your oilfield service company. Each option comes with distinct advantages, requirements, and timelines that can impact your working capital and operational flexibility. Below are the most common financing solutions used in the oil and gas industry.
Traditional Loans
Traditional business loans are a common financing option for many oilfield service companies. However, when you apply for a loan through a bank, you must qualify and get approved for a set amount. Once the approval process is complete, you will then get the cash you need. Keep in mind that this process can take weeks or months before you get access to any money. When it comes to day-to-day operations, this may not work for your company.
Furthermore, when you finally get approved for a traditional bank loan, the funding is usually secured by business and personal assets. You must also pay monthly interest to the bank, depending on your credit and other factors.
Oilfield Factoring
Oilfield factoring is a common way for service companies to get the money they need to operate. If you are unfamiliar with the process, the Ultimate Invoice Factoring Guide covers it in depth. But, to put it simply, factoring is a financing option where a service company sells its invoices to a factoring company at a discount. This provides you with a wide variety of benefits.
- Fast Cash: Instead of waiting 30 to 60 days for a client to pay, factoring provides you with the immediate cash you need on your invoices. Depending on your situation, you can be advanced as much as 90 percent of your invoice value within 24 to 48 hours. Once a client pays their invoice, you will be paid the remaining balance minus a small factoring fee.
- Bridge the Gap: Factoring helps to bridge the gap when it comes to meeting payroll and other expenses while waiting for your clients to pay.
- No Debt: With factoring, you won’t have any debt you have to pay back like you would a traditional bank loan.
- Credit: Factoring doesn’t require good credit on your part. Rather, it’s the credit of your clients that is taken into consideration.
- Cash Availability: When you factor your invoices, you will have a consistent cash flow that will allow you to grow your business and take advantage of new opportunities.
- Back-Office Support: Factoring companies provide back-office support, including invoice management services, credit checks, and collections at no extra cost.
- Additional Services: Once you’re established with a factoring company, it can also help you address other needs, like renting or purchasing oilfield equipment.
Investors
While asking friends or family to invest in your service company may sound like a good idea, you may want to think twice about it. When money comes between loved ones, things can get difficult, especially if things don’t go as planned. Angel investors, on the other hand, are professionals who invest money in different businesses. However, they require some sort of profit-sharing, a percentage of your company, or their money paid back with interest.
If you do decide to finance your service company through investors, it’s important to do your research and be prepared to convince them to invest.
Essential Factors When Evaluating Oilfield Financing Options
Before selecting financing options for your oil and gas company, assess these critical factors that extend beyond basic rates and approval terms:
- Industry Expertise and Relationships: Does the financing company understand water haulers, midstream operations, and energy sector challenges? Partner with an oilfield factoring specialist who manages customer relationships professionally and adapts to oil price fluctuations.
- Contract Flexibility: Are you locked into minimum requirements, or can you access capital solutions selectively? Evaluate whether you can receive funding only when business needs demand it, avoiding costs during slower periods.
- Growth Scalability: Will funding options expand as you grow? Verify that capital to cover operating expenses increases from initial amounts to higher levels spanning 90 days of receivables as your oilfield service industry expands.
Evaluating these factors ensures you select funding solutions that support your operational needs both today and as your business grows in the energy sector.
Choosing the Right Financing Option
Whether you decide on a traditional bank loan, factoring, or investors is the right way for you to finance your business, it’s important to take the time to do your research. Regional factors may also influence your financing decision. For example, oilfield factoring in Texas often reflects the operational pace and infrastructure of areas like the Permian Basin and Eagle Ford. If you have any questions, contact Oilfield Factoring to speak with one of our financing experts. We are more than happy to answer any questions you may have and provide you with a free, no-obligation quote.
