6 Oil and Gas Startup Funding Options
As any founder knows, having access to funding for your startup is the key to a successful launch, growth, and ultimately the long-term success of your business. Without access to capital, it’s difficult to cover everyday expenses like payroll and purchasing supplies or equipment. It’s also hard to go after the big projects that can help your business grow. But what are your choices when it comes to oil and gas startup funding options, and how do you access funding?
Oil and Gas Startup Funding Options
There are a wide range of different options when it comes to securing oil and gas startup funding. From the more traditional to the more innovative, here are 6 oil and gas startup funding options.
Government Funding & Financing for Energy Businesses
The Department of Energy and other government agencies offer several programs to provide funding for startups, including those in the oil and gas sector. Requirements for these grants, loans, innovation fund, and other funding opportunities will vary depending on the specific program. They all require applications that can be lengthy, but are often worth the investment of time if you’re approved. Be sure to check with your state or provincial government to see if there are other funding and financing options available to startups in the energy production business.
Equity funding is a type of oil and gas startup funding option where you give away a portion of your company in exchange for cash. With this type of funding, there is significant risk involved. If your business is not successful, the investor is out the money they invested. However, if you’re successful, their investment is paid back (with interest). Oil and gas operators may prefer this option as often an investor takes a special interest in the company and helping it succeed. They invest not just their cash, but also their experience in order to help the company be successful.
Equity funding can come from several different sources, including:
- Angel investors. Angel investors tend to invest smaller amounts in companies, but do so quickly. They don’t require direct control, and generally want to make an exit (and get a return on their investment opportunity) sooner than a VC investor.
- Venture capital (VC) investors. VC funds are run by seasoned professionals who know how to weigh risks. If your venture isn’t going to look like a solid bet from the outside, you’re likely going to be passed on. Forbes calculated that the probability of a new business obtaining VC funding in the US is very, very small. Learn more if VC is right for your startup.
- Small business investment companies. The Small Business Administration (SBA) licenses and regulates a program called Small Business Investment Companies (SBIC) that provides venture capital financing to small businesses.
- Crowdfunding. Crowdfunding allows startup founders to raise funds from a large number of individuals, reaching potential investors without having to go through the lengthy process of raising venture capital. While they can be equity-based, you can also crowdfund without giving up equity in your business. Equity crowdfunding allows companies to remain private but raise funds from the public.
A traditional source of oil and gas startup funding, bank financing can take the form of a line of credit, business credit card, or a small business loan. These options require a lengthy application process, as well as a detailed business plan that shows profitability within a certain amount of time. Short-term loans have a short repayment period, while long-term loans let you pay back over a longer period of time.
Credit cards come with high interest rates, and often don’t have limits that are large enough to cover the funding needs of a startup, but can be a good option for covering smaller business expenses. A line of credit offers more affordable interest rates, but can be hard to qualify for. The good news is that as your business grows, so will your available credit. Many small businesses use business bank financing along with other oil and gas startup funding options.
Another oil and gas startup funding option is bootstrapping, or self-funding. However, you have to be a pretty high net worth individual in order to realistically consider this option. It’s just not practical for most oil and gas startup companies. The cost of equipment alone is staggering, nevermind covering supplies and payroll for a newly launched organization. There are likely very few oil and gas startups that can successfully self-fund.
Incubators and accelerators are programs for startup companies that provide access to capital, mentorship, and networking. They are slightly different: While an incubator helps entrepreneurs build their business (the focus is on developing a business plan, name, website, and minimum viable product (MVP), if you already have an MVP, an accelerator helps expedite growth. With an accelerator, founders receive mentorship, funding, and networking connections designed to really launch and grow the business.
Invoice factoring is a form of financing where a business owner sells invoices to a factoring company for fast access to funds. The business owner receives cash for the invoice amount, usually less any fees, ahead of the payment terms. The business owner’s customer, who is responsible for paying the invoice, instead pays the invoice amount to the factoring company according to the original payment terms. Invoice factoring also goes by the terms accounts receivable factoring or receivable financing. (It’s important to note that this is different from invoice financing, where a factoring company still gives a business owner cash for their invoice, but the business owner pays back the invoice amount themselves, plus a fee. Find out how to choose between invoice factoring vs invoice financing.)
Oil and gas startup founders need access to capital if they want to succeed. It’s well-known that the energy industry’s susceptibility to boom and bust cycles can cause unexpected cash flow crunches. Add that to the fact that larger oil and gas companies tend to be slow invoice payers, with net terms of 30, 60, 90, and even 120 days! These combined realities highlight why oil and gas startups must have easy access to cash. Invoice funding offers one of the easiest and fastest oil and gas startup funding options — especially when stacked against traditional options such as bank loans.
How to Get Oil and Gas Startup Funding
When it comes to determining the best oil and gas funding options for your startup, there are a few steps to follow.
1. Determine needs. Before reaching out to investors or applying for financing, you need to determine how much funding you’ll need, and whether it’s a one-time sum or ongoing. Use this calculator to help determine your startup costs.
2. Create a business plan. Investors and lenders are going to want to see a business plan that shows your pitch and path to profitability before handing over funding.
3. Determine financial health. You need to know exactly where your business stands financially before you can figure out how much additional funding you need.
4. Research funding options. While this post has no doubt helped you see that there are many oil and gas startup funding options available, you should thoroughly research each option to determine what’s best for your business. There are plenty of free resources available online about how to approach investors, apply for business grants, or distribute equity.
5. Make a repayment plan. Finally, if you’re going to accept capital to help fund your oil and gas startup, it’s important to have a plan to pay it back. An online business loan calculator can help you estimate payments, which should then be worked into your budget. If you can’t make the payment, don’t take the funding.
No one type of oil and gas startup funding will work for every company. Some need a small injection of cash while others need a massive influx. For some, a one-time investment is all it takes to get growing, while others require consistent access to working capital. Whatever the case is for your business, look at your current finances and available funding options to determine the best path forward.