Like many industries globally, the oil and gas sector in the Permian Basin faces challenges that are impacting companies’ operations and growth. Key among these are rising operational costs, supply chain constraints, and shifting investor preferences.
In fact, a trend has emerged among large national banks and investors as they shift their lending and investment strategies away from the fossil fuel industry and toward renewable energy alternatives.
Meanwhile, the Permian Basin continues to be a significant player in the U.S. oil and gas sector. Still, for some businesses in the region, it has become more difficult to find funding sources to support operations and expansion.
The good news is that oil and gas businesses—and those that service them—in the Permian Basin can leverage strategic partnerships and innovative approaches to navigate these challenges and successfully evolve with the times.
The following banking and finance tips can help businesses in the Permian Basin oil and gas industry power profitability, especially in the face of our current economic climate.
Work with a local banker who understands the oil and gas industry
Companies looking for a commercial loan from a large national bank may discover these institutions are more heavily scrutinizing loan requests from businesses in the fossil fuel industry.
Alternatively, consider partnering with a bank that has decision-makers who live in the Permian Basin. These bankers tend to naturally be more invested in the success of your business and its positive impact in the local community than, say, a loan officer who lives in New York City.
Also, a local banker is more likely to understand the nuances and importance of the oil and gas industry for the local and national economy. Therefore, they are apt to be a stronger advocate and more effective partner than someone who is unfamiliar with the sector.
Explore equipment financing options
As in any industry, businesses in oil and gas must continue to repair, replace, and upgrade equipment to operate successfully. Whether it’s drilling rigs or trucks or safety systems, the right equipment could make all the difference in offering a competitive advantage.
However, paying the full cost outright for expensive new equipment may not be the best strategy for many Permian Basin businesses, especially if it means cutting too deeply into working capital or savings. That’s when an equipment loan may be a good option.
Equipment lending in commercial banking refers to loans or leases provided to businesses for the specific purpose of acquiring equipment. This form of financing can help companies obtain the machinery, vehicles, technology, or other tangible assets needed to stay competitive while managing cash flow more effectively.
Explore an accounts receivable and inventory line of credit
Aside from equipment needs, Permian Basin businesses in the fossil fuel industry may find there are times when they need access to available financing for the unexpected. In these instances, an accounts receivable and inventory line of credit may be an affordable, ongoing option for financing.
With this form of financing, a commercial bank can opt to provide a business with a line of credit, using the business’s accounts receivable and inventory as collateral. The business can then use this line of credit whenever needed. Interest is charged only on what the business uses, and the line can be paid off and used again.
When exploring this option, look for competitive interest rates, easy access to funds, and repayment terms customized to fit your business’s unique needs.
Consider using a factoring service
Factoring can be a viable option for companies that need cash quickly—for example, to address an unexpected expense or opportunity, or to quickly boost cash flow. It can be especially beneficial for businesses that have a long invoice payment cycle.
This form of financing is generated from a business’s unpaid invoices or purchase orders, which are assigned to an alternative lending company that then converts it into cash. It is not a loan and does not add any burden of debt. Factoring—which can often be approved within 24 hours—can be an alternative to traditional capital financing, which can sometimes take weeks, or even months, to receive approval.
Businesses interested in this form of financing should ask their commercial banker whether the bank is affiliated with a factoring service, as there can be benefits to this arrangement. A partnership between a bank and a factoring service that both know the oil and gas industry can foster a natural referral system to serve the client’s best interest for the long-term.
For example, American Momentum Bank is affiliated with factoring company Security Business Capital (SBC), which also has local decision-makers. An AMB commercial lender may know a factoring service is a wise option for a client given their circumstances; or, SBC knows to refer clients with more traditional banking needs to AMB.
In the face of evolving challenges and opportunities within the Permian Basin’s oil and gas sector, companies can remain adaptable and profitable by leveraging strategic banking relationships and innovative financial solutions.
American Momentum Bank proudly serves the oil and gas industry and has four locations in Odessa, three in Midland, and others in the surrounding communities in the Permian Basin. Odessa Market President Greg Simmons can be reached at gsimmons@americanmomentum.bank.