Having the right equipment is vital to the day-to-day operations of every oil and gas business. But for most businesses buying heavy equipment outright, and releasing such large sums of operating capital, is simply not the right option. As a result, oil and gas companies must instead look for options to finance the equipment they need.
As we know, oil and gas is a very specialized industry, and as such, it can be tough to finance such unique equipment through a standard banking institution. As a direct lender and finance solution provider who specializes in the oil and gas industry, Summit Funding Group can recommend three best practices for securing heavy equipment financing and finding the right finance partner for this specialized business:
When considering working with a finance company, oil and gas professionals should ask themselves, “Do you know who your account manager is?” and “Can you sit down at a table with them if there are issues?”
Financing such specialized equipment, often for very large sums of money, there are almost always going to be challenges and hiccups that arise during the financing process. How an equipment lessor manages these issues for their client is what will make the difference.
At Summit Funding Group, we recently secured financing for an oil services company for the use of frac stacks for their rental fleet. We had secured the capital lease requested by the client, and partial funding was already provided.
That’s when the client called us with a problem. They realized after striking the deal that their existing bank covenants restrict them from incurring any more debt. The lease they had secured with us had done just that.
Here is where personal service can make a difference.
The deal was signed, money was out the door, Summit could have easily turned its back at that point and said “Sorry, a deal is a deal.”
Instead, we agreed to work with our client’s bank to negotiate a compromise that would work for both parties, while allowing our client to obtain the equipment they needed. We ultimately changed the structure of the lease to an operating lease, so the equipment would no longer be on the company’s books and no additional debt would be incurred.
This type of issue is not an unusual scenario when it comes to heavy equipment financing. Owners should be aware of exactly who they are dealing with and to what extent their equipment lessor will go to bat for them, particularly if a deal goes sour. Personalized and attentive service should be standard practice for an equipment finance partner. If a company does not have a banker that knows their business inside and out and who they can call directly at any time, that company may be wise to consider seeking a new partner for their equipment finance needs.
Financing Volume Capability
When it comes to equipment financing, there are plenty of financial institutions that are willing to provide leases for heavy equipment, but these leases are often only available for small sums, in the $1 to $5 million range. Smaller financing amounts like these are common because of the nature of the equipment itself, as well as the fact that big banks often do not have the expertise necessary to understand the value in specialized oil and gas equipment.
While working with a standard financial intuition will suffice when owners are running small operations, what happens when they grow and need leases for $10, $20 or even $50 million worth of new equipment? This is where owners need to be sure they are working with an expert, and one that can accommodate their growing business’ finance needs.
While it is certainly possible for an owner to go out and seek several $1 to $5 million leases to make up the large amount of financing they seek, it is most certainly not easy. It is also inherently time consuming for owners who need to be in the field, not stuck in an office searching for financing.
A financial partner should do the work for their client.
If a company needs $10 million, they should not have to go to 10 different lenders (or more), and fill out multiple applications to achieve 10 leases for $1 million each. Instead, they should fill out one application, providing all their information to their financial partner, who should then seek, secure and service the financing they need.
Summit Funding Group secured a client $43 million for the three frac spreads by utilizing seven different lenders. To accomplish this, we had to engage more than 35 banks in order to secure the necessary financing for the client. Once secured we handled funding, billing the client and collecting payments from the client directly, so they did not have to deal with seven different lenders each month.
This saved the client incalculable amounts of time, as they were able to work simply and directly through Summit Funding Group to secure multiple leases. Summit’s client didn’t have to try to start the leasing process and present their financial case to dozens of lenders.
When seeking secure financing, owners should be aware of their financial partner’s capability and flexibility. A finance partner should be someone who can always accommodate a growing business’ needs.
Handling Unique Collateral Types
When it comes to equipment leasing in the oil and gas industry, traditional lenders often do not understand the value in specific types of oil and gas equipment. This lack of knowledge and understanding means they are often unwilling to provide leases on specialized equipment such as pressure pumps, hydrators, blenders, coil tubing units, frac stacks, frac tanks, rig mats, lay flat hose, compressors and oil/water separating systems.
These are just a few of the collateral types that are unique to the oilfield industry, which Summit has financed as a specialized finance provider.
Before choosing a finance partner, owners should evaluate a financier’s knowledge of their business. Owners should make certain their financial partner is flexible and knowledgeable about their specific industry, and that they understand the value and complexity of the equipment.
We recently worked with a client who needed financing for $30 million of equipment. The issue with this particular need was that the equipment was really a mixed bag, and included items of high collateral value to lenders, such as cranes, as well as items that were more difficult to place value on, such as IT equipment.
While many banks were more than willing to finance the use of the cranes, most had difficulty seeing the value in the IT equipment and other specialized equipment that lacked the obvious re-sale value when used as collateral.
Summit Funding Group was able to finance all the equipment under a single master lease agreement, because we understood the value of the equipment as a whole, and how each piece was vital to the operation of the other.
The bottom line is that the oil and gas industry is uniquely specialized, and borrowers should insist on working with equipment lessors who are experts in their industry and its equipment.
The right finance expert will provide personal service that will be invaluable when navigating the often treacherous financing waters. They should also be finance experts, equipped to handle a growing business and its financing volume with unique solutions. Most importantly, they should not just be finance experts, but oil and gas industry experts that understand the equipment and value it contains as collateral, and can utilize this knowledge to provide the best financing possible.
Tags: Leasing Heavy Equipment, Summit Funding Group
Eric Freeman is Vice President of Summit Funding Group, an Ohio-based company that provides equipment lease and finance solutions to businesses across the U.S. and Canada.