Finding Funding

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In a time of extensive mergers and acquisitions (M&A), momentum reversals in energy transition, and other industry turmoil, oilfield service companies (OFS) looking to finance fleet upgrades or expansions face some headwinds. The good news is there are still many workable options available.

While bank financing is still on the menu, many bankers are concentrating on producers over service companies, and collateral for service companies typically involves depreciating assets like trucks and tanks. Invoice factoring and related options have continued to be viable, especially as many service companies must wait months to be paid for their work.

Small Companies, Big Challenges

Grant Swartzwelder, who is involved in both financing and OFS ownership, sees the issue from multiple angles. And from any of those views, things look like a challenge, especially for smaller companies.

“The last ten years have seen many banks pulling away from financing oilfield service companies,” he observed. “Especially from the smaller ones. They are deemed to be a higher credit risk.”

Many service companies are looking at invoice factoring (to be examined in detail further along in the story), at least for working capital, which Swartzwelder distinguished from equipment loans. Banks tend to avoid loans for equipment because that kind of collateral can be hard to collect on.

“If you have to foreclose on equipment, especially in a down market, which appears to be on the horizon, you are hard-pressed to sell for a reasonable value,” he said. “Many big companies don’t want to buy used equipment, and most smaller ones can’t afford to bid.”

Most bank money that is available comes through Small Business Administration (SBA) loans available through certain banks, he noted. But there are downsides to this route. “Those loans are a little more expensive, there are upfront fees, higher interest rates, and it takes longer because you have to wade through a lot of approvals. But when your choices are really limited, you deal with those extra challenges.”

Swartzwelder observed the ancient borrowing irony that the more money a borrower has, the more he can borrow. “If you’re rich enough, they’ll always lend you money.”

Another alternative regarding mobile equipment like vehicles and earth movers might be manufacturers’ financing. Much like Ford and GMC financing, some equipment companies, like Caterpillar, may also offer plans, he said.

Finding money for equipment is mostly an issue for smaller service companies. The national and multinational OFS firms have more options. Those include tapping large banks and bond pools, depending on their credit rating, Swartzwelder said.

Paying It Back: Shrinking Client Pools, Stretched Budgets

OFS companies face internal cash flow issues on several fronts, he said. All the operator M&A activity, especially since 2020, has created winners and losers in the service realm. When two operators merge, one service company may double its workload while the other loses all of it. The less fortunate one then faces an ever-shrinking client pool as other mergers continue unabated.

It also means that the now-bigger operators “are looking to larger service companies to meet more of their needs and to cover more territory,” he said. So even the smaller service companies may need to merge, buy, or sell out to stay competitive.

This creates cash flow issues. So do tariffs and supply chain delays, said Swartzwelder. “In this environment manufacturers want more money up front, making it harder for smaller companies to order and pay for equipment.” Steel prices, in particular,have risen due to tariffs.

Banking on Steady Relationships

For Frost Bank President Jack Herndon, it’s the steady-as-she-goes approach for equipment financing. “We haven’t changed our approach for equipment lending. Frost is a relationship-focused bank,” he said.

For underwriting they focus primarily on “borrower cash flow and adequate capitalization.” As noted above, this local bank’s focus is indeed local. “In the OFS space, we lend to privately held companies with proven historical performance. Therefore, deal sizes tend to be smaller, as those types of borrowers tend to be more conservative.”

Here’s a Contraction

Herndon’s view of the way M&A activity challenges smaller service companies agrees with Swartzwelder’s. “As we tend to deal with smaller companies, it is not uncommon for them to have concentrations in their customer base. When larger operators acquire smaller firms, they don’t always choose to maintain existing MSA’s. As a result, we’ve seen instances where clients have had to work to replace those relationships with other operators,” he said.

The Factoring Factor

For Kalah Sprabeary, founder and CEO of HUB Funding Solutions, factoring has been a significant option in accounts receivable (AR) funding across her 13 years of experience in the sector.

Essentially, a factoring company looks at a service company’s outstanding invoices, which mostly come from operating companies, and bases a line of credit to the OFS on that amount. In return, the OFS assigns the invoice to the factoring company to receive payment from the operating company, less a fee. It amounts to creating continual cash flow without long term debt.

Sprabeary explained that there are three types of AR financing.

“There’s factoring, there’s ledger lines, and there’s ABL [Asset-backed lending]. In this industry, ABL is usually not available to most people.”

An ABL, like an SBA loan, is complex and time-consuming, she said.

“That is more along the lines of a bank line of credit or a bank loan that’s based on the accounts receivable. You get an APR [annual percentage rate quote, but there’s a lot of requirements from a bank standpoint. And those requirements can turn off most people.” At least that is true on the service side. Debt-to-service income ratios are typically easier for operating companies to meet than OFS firms.

Option two, ledger lines, “is in between an ABL and factoring,” she said. “You still turn in invoices, the ones that you want to, but it’s based on an APR.”

Ledger line rates can be very borrower friendly. “I have a ledger line for a service company right now that we got down to 0.67 percent.”

Even this one may not be for everyone. “There’s a bit of reporting. It’s really for more sophisticated operations, but it’s something that I love to move people into when they’re ready for it and help them get that way.” Ledger-line candidates “normally have a good back office, somebody that can do reporting regularly have to be a little bit more advanced on their bookkeeping.”

This is a customized approach, wherein “we negotiate with different lenders to create a custom setup. I’m getting people out the door where they’re only spending 1 percent to maybe 2 percent, max [in interest].”

New Sophistication and Flexibility Required

For Sprabeary, today’s market is demanding more flexibility in financing for the OFS sector to stay viable. “The borrower is more sophisticated and the needs are tighter. The margins are tighter [due to lower oil prices and higher costs and the aforementioned tariffs]. And so I think a lot of people want to utilize it and they want to utilize financing, but they need that customization now, and they deserve it.”

In line with Swartzwelder’s observation, Sprabeary said banks have long shied away from OFS lending, as some have also avoided oil and gas altogether for ESG reasons in recent years. And in recent years the banks themselves have struggled with COVID-related defaults and other challenges. So, many times “they can’t take chances,” even with OFS companies they may have worked with in the past.

While competition is rising, she sees at least some service companies, “the smart guys,” being more selective about client choice, not picking up every MSA (Master Service Agreement) that comes along. Instead, they’re evaluating who pays well and on schedule.

And they’re also looking for bargains. Sprabeary talked to three different-sized clients—large, medium, small—and pretty much all are “buying up anything used on the market that was liquidated by the banks” before the end of 2025, which was still in the future at the time of this interview.

The buying flurry in that time frame came about due to updates in expensing options passed in 2025. The One Big Beautiful Bill Act (OBBBA) significantly boosted Section 179 expensing, raising the limit to $2.5 million (from the previous $1M+) and the phase-out threshold to $4 million (from $2.5M) for property put in service after December 31, 2024. This allowed businesses to deduct more upfront for equipment, indexed for future inflation, enhancing cash flow.

For equipment, Sprabeary said they were negotiating rates as low as 6.4 percent late in 2025. As a broker, HUB Funding mediates between lenders and clients to get those rates. By soliciting a variety of lenders and giving clients options, she said, “They don’t get their credit [rating] destroyed in the process.”

Equipment Lending Shifts Gears

For the upcoming year, Sprabeary sees the power demands of data centers pushing up natural gas prices as more tech companies are building their own gas-fired power plants—which could push HUB Funding’s opportunities up as well. For gas to be produced, “[a well] still has to be drilled, it still has to be maintained, it still has to have infrastructure to do so. We just have a new set of operators.”

She added, “We’re upgrading our systems right now to handle more from a volume and underwriting standpoint because the demand is going to be there, but the bank-based funding is not. So, we are gearing up with our relationships, with our systems, to be able to support that.”

In the oil and gas industry, as a whole, its shorter and shorter price cycles will make it harder for a couple of guys and a pickup to start a company without significant planning, in Sprabeary’s view. “You’re not going to be able to walk into oil and gas with a dream and an empty wallet. You’re going to have to have a stake in the game. You’re going to have to have credit. You’re going to have to really work to be a strong borrower. And we’re helping people do that, but it’s the time of ‘mature your business or it’s not going to be there anymore.’”

 

Paul Wiseman is a longtime writer in the energy industry.