Working Capital Management
Funding Oil and Gas Projects: How to Choose the Best Options
When it comes to funding oil and gas projects, there are a number of different funding options to serve your business, no matter what stage you’re in. However, choosing the best options for your needs often comes down to a few different considerations. Here are some things to keep in mind when looking at different funding options, and how to choose the best options for your business needs.
Options for Funding Oil and Gas Projects
The first step in choosing the best funding for oil and gas projects is to know what options are available to you. There are a number of different options when it comes to funding oil and gas projects, from the more traditional to alternative financing options. Let’s look at some of the available funding options.
Line of Credit
One of the more popular traditional financing options is a business line of credit. A line of credit is a popular funding choice for businesses as it is often the cheapest source of funding, and it’s versatile and flexible. It’s easy to draw on when you need it, and you can simply leave it alone when you don’t. While the convenience of a line of credit is appealing, there are a few factors to be mindful of if you decide you want to apply.
First, is that the application process can be time consuming. You won’t just apply for a line of credit and have access to funds right away. It can take weeks or even months to put together an application and then you have to wait for approval. The second is that you’ll need to be profitable, and have statements for at least a couple of years proving so. Keep in mind that your credit limit will be based on historical financials, not your forecasted growth, so it might not keep up with you if you’re scaling rapidly. Finally, you’ll need to provide a personal guarantee. (This is pretty standard and is likely also required for any alternative finance options you might consider.)
Invoice factoring (aka invoice funding) is another popular choice for funding oil and gas projects, as it allows companies to unlock capital tied up in accounts receivable for work that has already been completed. Oftentimes, business owners have to wait 30, 60, 90 or even 120 days for customers to pay, leading to cash flow issues. An invoice factoring company advances the total of your invoice (less fees) way ahead of the payment terms, and works with your customer to collect payment according to the original invoice terms. The result is increased cash flow for making payroll, paying suppliers, and taking on large projects, without negatively impacting your customer relationship.
Some pros of invoice funding include: debt-free funding (not a loan!); non-dilutive capital; unlimited access to capital; fast turnaround – funds are often deposited in a matter of days; save time without having to chase accounts receivable; approval is not based on your business credit history. The downsides to invoice funding are that invoices need to be verified (customer contact sometimes required), and transactions can be complicated to account for in bookkeeping.
(Note: Invoice factoring is different from invoice financing, which is when 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. Read our blog post on the difference between invoice factoring and invoice financing for more info.)
If you’re looking for funding for oil and gas projects, unsecured business loans are a popular choice because they often require little to no personal or business assets to serve as collateral. However, without collateral the business must demonstrate a robust financial history as well as a positive forecast of its future cash flow in order to qualify. They also often come with high interest rates, making them an expensive source of capital.
Another type of business loan, B2B lending is when one business chooses to loan funds to another. In many ways, B2B lending operates in much the same manner as a traditional bank loan, with similar terms and conditions. Because B2B loans are term loans much like a bank, they also have many of the same requirements. Businesses will need to have high credit scores, established business histories, and a specific amount of annual revenue in order to qualify.
A working capital loan gives you funding specifically for everyday operations. Short-term cash flow crunches are the most common reason businesses get these loans. This can be due to a growth spurt, taking on a new project, or simply a gap in sales. They can take the form of term loans or cash flow loans with a fixed fee. The major drawback of working capital loans is their high interest rates. They’re also often tied to the business owner’s credit, which means they’ll bear the responsibility should anything happen.
Merchant Cash Advance
A merchant cash advance (MCA) is an alternative lending option that is gaining traction with small businesses. How it works is a business is advanced a loan against its future credit card sales. Basically, the business agrees to sell a fixed percentage of its future sales (with interest) for an immediate cash advance. A MCA is often available to companies with little credit history, and doesn’t require additional collateral. Unfortunately, these less stringent requirements come with high interest rates that make MCAs much more expensive than if a business were to take out a traditional bank loan.
Venture capital, or VC funding, can help businesses grow at an incredible rate. Unfortunately, those companies you see raising millions are exceptions, rather than the rule. Finding venture capital is easier said than done, and isn’t necessarily a reliable option for most businesses. The process of raising VC funding involves a lot of time and effort courting employees at VC firms from the low-level analysts to the partners themselves. However, the odds of actually getting funded are a crapshoot. They are hardly something that can be relied upon to provide working capital or bridge a cash flow gap.
Funding Oil and Gas Projects: How to Choose the Best Options
When it comes to choosing the best options for funding oil and gas projects, here are a few pointers to keep in mind.
- Fees: One of the most important factors businesses consider when comparing funding options are the fees. Different financing options will have different costs of borrowing or funding. Be sure to compare the fees between different funding sources when looking at which is best for your business needs. You want to be sure that the cost doesn’t eat too deep into your margins. And don’t forget hidden fees. Ask the lender for their fee schedule.
- Funding need: Another thing to consider when looking at funding oil and gas projects is what exactly you need the funding for. For example, you could use your line of credit on normal expenditures like inventory, payroll, and marketing. While you’re growing you could use another financial tool designed for fast access, like credit cards, a merchant cash advance, or invoice financing to fund more purchase orders. By having multiple options for fast, flexible financing, you can get the cash to fund new work so you can grow without going into debt – or have more options ready in case your original funding application doesn’t get approved.
- How quickly you need access to funding: Some of the more common types of funding types (like business lines of credit) take time to set up and get access to. Others (like invoice funding) can get cash in hand in a matter of days. Consider how quickly you need access to working capital when comparing your options for funding oil and gas projects.
- Ease of application and approval: Many oil and gas funding options have strict eligibility requirements and call for an extensive financial history (including annual business revenue) and excellent personal and business credit scores to qualify. A lot of businesses simply haven’t been around long enough to establish the credit history necessary to qualify for these funding options. Thankfully, there are other types of funding available for these new and growing companies.
- Type of agreement: It’s best to have the flexibility to choose how and when you use different funding options. Technology-enabled factoring companies, for example, have revolutionized agreements such that you don’t need to be locked to long-term contracts to access the best rates.
There are many ways to fund your business out there and they are not mutually exclusive. You can – and should – have multiple sources of funding that complement each other well. If you and your accountant or bookkeeper can determine your financial needs and goals together, you’ll be well on your way to finding that ideal funding mix.