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Business Loans for Oil & Gas Companies

oil-company

The United States has over 9,000 independent oil and gas companies, many of which employ just twelve people. While the layperson thinks of Chevron, Exxon, or Mobil when naming and oil or gas company, countless smaller businesses support the industry in exploration, extraction, refining, and transportation.

The oil and gas industry has a total industry size of $339.1 billion, petroleum refining has an industry size of $589.3 billion, and the oil pipeline transportation industry $14.1 billion. Depending on where you want to launch or grow your business, there’s plenty of room to be successful.

Reasons for Oil and Gas Companies to Borrow

There are many reasons for oil and gas companies to borrow. Some support continuing operations and others promote growth and expansion. Identifying why your company needs to borrow can help you find the best lender – some lenders may not offer the loan product you need, others could have terms that don’t work with your business. 

Getting clear on why you need to borrow before applying for a loan helps you borrow successfully. Here are the top reasons that oil and gas companies borrow money.  

Purchase equipment

The oil and gas industry is equipment heavy – from shale shakers to sand pumps, there are a lot of tools on an oilfield. At a refinery, you’ll need storage tanks, pumps and exchangers, and pressure vessels. Regardless of where you operate in the industry, the right equipment keeps you in business.

But equipment wears out, or becomes outdated. When it’s time to replace it, many small businesses need to borrow. Borrowing to purchase new equipment can also support an expansion. To grow and take on new business, you may need to purchase additional storage tanks or sand pumps. 

Meet working capital needs

No matter how closely your accounting team monitors your budget, cash flow issues can arise. A customer’s payment doesn’t arrive on time, or there’s a delay in processing a deposit. But you still need to meet your daily operating expenses.

Working capital are the funds you have available to cover expenses like payroll, rent, and utilities. Paying these bills keeps the lights on – and the pumps running – so for many small businesses skipping a payment isn’t an option. This is a situation where borrowing short-term is a good choice.

Expand operations

Is it time to grow and expand your business? Maybe you want to add pipeline, or transportation routes, to get oil to market faster? Perhaps you need to invest in more research and identifying natural gas reserves? 

When it’s time to expand operations, many small businesses borrow. Borrowed capital allows them to invest in an expansion without pulling money from daily operating expenses. If your business’ cash flows can cover the loan payment, it’s less risky to borrow the funds than to take a huge sum of capital out of your reserves. 

Acquire another oil or gas company

An acquisition is another way to grow – particularly if it would expand your reach into a new market or geographic area. Acquiring another oil and gas business that’s for sale allows you to skip the work of marketing and reaching out to new customers. But it requires a large sum of money upfront.

You’ll have to pay a valuation company to put together the company’s true value, lawyers to help draw up contracts, and brokers to negotiate the price. Then you’ll have to buy out the sellers. A large business loan is excellent for this purpose.

Questions to Ask Before Taking Out a Loan

Once you know why you need to borrow, and how you intend to use the funds, ask yourself a few more questions before approaching lenders. 

How much money do you need to borrow?

Different lenders work within lending caps. Some can lend up to $2 million, others prefer to extend credit in smaller amounts. 

Traditional banks prefer to work with larger loans – for them the costs to underwrite and fund the loan are the same regardless if it’s a $50,000 loan or a $500,000. If you need a smaller loan, you could find it difficult to get funding at a bank and might have better luck with an alternative lender.

What is your credit score? 

Your credit score is a numerical representation of your creditworthiness. A good credit score reflects an on-time payment history, no bankruptcies or loan defaults, and reasonable debt balances. Lenders view it as a sign that you’ll be responsible with the funds they lend you.

Banks and traditional lenders prefer to work with borrowers who have credit scores of 720 and above. If you have a score below this level, you can get funding at an alternative lender.

How long have you been in business?

Bankers and the traditional lending community are known for taking a conservative approach to lending. They want to see that a business has a long history of success, including growth and decent cash flows. When you apply for a bank loan they could ask to see several years of tax returns and financial statements.

Newer businesses may be successful but lack the time in business to appear “safe” to a bank. Alternative lenders will extend credit to your oil and gas business after just two months in operations as long as you have decent revenues. 

What can you afford to borrow?

Anytime you borrow money, you need a plan to pay it back. Before taking out a loan, prepare a budget. Put the loan’s projected monthly payment into your budget and see how it will impact cash flows. 

Your current revenues should be enough to cover the loan payment – at least for a while until any new project begins generating profit. If it looks like you would struggle to make loan payments, consider taking out a smaller loan. 

Best Business Loans for Oil and Gas Companies

Depending on your capital needs, one of these loans will work best for your oil and gas business. 

Equipment Financing Loans

Is it time to replace equipment, or buy new equipment? Equipment financing loans fund the purchase of specific pieces of equipment. The equipment you’re buying with the loan serves as its collateral.

Because it’s a collateralized loan, equipment financing loans have lower interest rates than unsecured loan products. Interest rates range from 7.5% to 12.5%. However, the risk to a collateralized loan is that if you default on the loan, the lender seizes the collateral.

For larger and more expensive pieces of equipment, the lender could request an independent appraisal. Before approaching lenders, find the exact equipment you intend to buy. It will make the loan approval process faster. 

Working Capital Loans

Working capital is the money needed for your business’s daily activities. If your accountant has come to you with a cash flow issue, and you don’t know if you can make payroll, consider a working capital loan.

Working capital loans have shorter terms designed to help small business owners who face temporary cash flow issues. Lenders can review and approve your loan application in hours, and release the funds in as little as a day. These loans are truly meant to cover temporary and emergency needs, and you can borrow between $10,000 to $1 million.

To qualify for a working capital loan, you’ll need a credit score above 650 and your oil and gas company must have minimum monthly revenues of $10,000. 

Large Business Loan

A large business loan could help fund an acquisition or expansion or other lage project. A large business loan lender offers loans in amounts between $50,000 to $2 million, enough to purchase a smaller or larger company. You can get a loan with a repayment period up to three years, which gives you time to integrate the acquisition and realize its financial benefits.

Because the loan’s capital and interest is spread out over a longer repayment term, you’ll have lower payments. This makes it easier to manage cash flow during the project’s launch phase. Rates range from 12% to 45%. Small business owners with a credit score above 530 and minimum monthly revenues of $10,000 qualify for this loan product. 

Short-Term Company Loans

A short term company loan falls between a working capital loan and a large business loan for repayment period – you can take between one to three years to repay it. It can be used to fund a smaller project – such as investing in less expensive equipment that wouldn’t qualify for an equipment financing loan or a small exploration project – which will be completed within a year.

Short term loans require a minimum credit score of at least 650 and two years in business. The business’ minimum monthly revenues must exceed $10,000, but you can borrow as little as $15,000 and up to $750,000. There are no prepayment penalties if you decide to pay it off early.

Oil and gas companies need more than crude oil or natural gas to keep running – they need capital. Borrowing wisely is part of running a successful business. When you partner with Shield Funding we work to match you with the best loan product for your capital needs. Reach out and speak to a loan specialist today.