At present, the oil industry is worth $1.7 trillion and the United States is home to over 9,000 independent oil companies. But while many people associate the oil industry with big bucks, this isn’t always the reality for these independent producers.
In fact, shortages of capital and cash flow problems can stop you in your tracks. This is especially true if you’re trying to get your company off the ground.
So how can you stump up the necessary business funds to keep your company afloat? Well, this is where outside capital investments might be able to help you.
Read on to find out more about easing your company’s financial burden!
What Funding Challenges Do Independent Companies Face?
Obviously, any company that can’t secure capital investment will face some financial challenges. But to really understand the funding challenges oil companies face, we need to look at where they come from.
We can link a lot of these problems with an unwillingness to invest in the industry. While the oil industry dates back to the 1850s, it doesn’t always feel like a stable market to financial institutions. This is because the oil industry deals with two things that can change: a finite resource and the element of chance.
Chance comes into play when establishing an oil well, so this may only affect certain companies. Drilling down to find this source can feel risky to potential investors. They’d much rather invest money when they know what you have found!
Because of this risk, it can be incredibly difficult for independent companies to secure investments.
There is little to no public funding in this market. And banks will ask for rigorous financial checks before lending anything. Even if a bank does approve a loan it will often come with strict terms that are hard to meet.
This means that companies find themselves struggling to pull together capital to keep ticking over. While they may be sitting on a gold mine, promises don’t pay the bills and company cash flow can run dry over time.
So how can you combat these problems? Well, let’s take a look.
Internal Reasons for Cash Flow Problems
The first thing you should address is anything internal that might be contributing to your cash flow problems.
Without addressing these issues they will continue with or without an investor. And they will cause you to waste money in the long-run. Often internal reasons for cash flow problems are related to the organization of your business.
Poor budgeting will obviously have a huge impact on your business. If you underestimate your overhead costs then you will quickly burn through any financial buffer that you had in place before. This is why you must make sure you work out your gross margins properly when drawing up a budget and should revisit this regularly.
Cash flow can also get tied up in your company’s assets. For example, buying lots of inventory means that your money is tied up in this. Similarly, if you don’t chase up on any invoice payments then you won’t have access to the company’s full capital.
Finally, you should always make sure you’re on top of any old debt. Being hit with a sudden deadline is sure to have a big financial impact on your company.
But sometimes addressing internal problems simply isn’t enough to keep your company afloat. In this case, it might be time to look for some help from an outside investor to get on top of things.
How Can Outside Capital Help Your Business?
If you need a cash injection, then an outside investor could be your best way forward. You can do this using a private investor or with the help of an investment company.
Getting a business loan from a bank is often where people look first when it comes to securing finance. But this isn’t always the best way forward for an independent business. You may struggle to secure the amount of money you need and this will leave your company in debt in the long run.
In contrast, oil or gas investment companies offer you the option of finance without running up a huge debt. These companies specialize in lending to oil businesses so they have a detailed understanding of the market. This means they can make better-informed investments that will really help you out.
They offer money as an investment in your business. This means that you only start paying it back once your company is financially stable. As a result, you won’t suddenly find yourself in cash flow difficulties when you return the investment.
Sounds good, right? Well, let’s take a look at some of the other benefits of securing your finances using outside capital.
You Can Get More Money Using an Outside Investor
As we’ve mentioned, outside investors have a better knowledge of the oil market than most financial institutions. And this means that they’re more likely to lend large amounts of capital. These can be extremely difficult to secure as loans from a bank, especially for independent companies.
If you’re an independent company then you will need to provide an extensive financial history in order to secure a loan. In essence, you need to demonstrate that you’ll be able to pay back the amount that you borrow. And a bank won’t always take current market trends into account when approving your loan.
In contrast, an outside investment company understands that to make big money in the oil industry you need to invest big money. This is why they deal with much bigger investments. An investment company will usually invest upwards of $1 million and some even invest up to $25 million!
You Could Secure Multiple Investments
If you really want to boost your capital then you can approach multiple investors. This secures capital without compromising your company’s financial future.
Getting multiple loans for your company can be challenging. After all, a company with lots of banks loans is a company with lots of debt. And most banks won’t lend to a company that already has several loans.
But a company with lots of investors looks like a good bet. So you could actually bring in more capital for your company by using multiple investors. You could get one big investment from a single company or you could approach several smaller investment companies.
This also means that all of your investment isn’t tied up in one company. So if you want to buy out investors further down the line then you can.
Outside Investors Offer Better Terms
When you take out of bank loan, you have to agree to strict terms. These are often fixed so if you can’t agree to them then you won’t get the loan. But if you can’t stick to these terms you’ll find yourself in hot water further down the line.
Outside investors offer more favorable terms for most companies. They’ll often give you a longer period before expecting a return or their money back. And some investors will only expect their money back once you’re financially stable enough to return it.
This gives you more time to use their capital effectively. It also means that outside investment is a better long-term solution for your company’s finances. You won’t find yourself thrown back into difficulty by paying off a loan.
Outside investors are also less likely to ask you to provide a guarantee. This is something that matches the value of that loan. It means that if you fail to return the money an investor or financial institution can seize this property in lieu of payment.
If you’re having cash flow problems, then you often won’t have any suitable property to guarantee. If you do, then putting it down as a guarantee ties your assets up even more. So avoiding this altogether is a better solution for your business.
What Should You Look for In an Investor?
When it comes to finding the right outside investor for your company, there are several things you need to look for.
Experience is vital. An investor with more experience will have a better working knowledge of the market. They’re also more likely to have more capital to work with so they can offer you a secure investment.
This means they can offer you better terms. Whichever company you choose to get your investment from, make sure you’re familiar with all of their terms. Discuss what works for you and only agree to something you can realistically deliver on.
Finally, you should always look at a company’s reputation. Do your research and speak to other people who’ve secured investments from them in the past. This will give you a good idea of who you’re working with.
After all, your investors reflect something about your company. So you want them to be top-notch!
Get Your Hands on Outside Capital Today!
It’s pretty clear that outside capital is a great way for independent oil businesses to secure funding. Not only can you get your hands on more money, but you can borrow at a rate that works for your business. What’s not to love?
For more help finding an investor, check out our handy tips! Or get in touch today for more information.