Equipment leases are a good financial alternative for oil and gas companies
Equipment is a major expense for companies in the oil and gas industry. And with declining oil prices, buying with cash or financing aren’t ideal or even possible. That’s why equipment leasing is becoming a popular option for many companies.
“Cash is king, and businesses want to keep as much cash as possible on hand to help them through the downturn,” says Eric Freeman, vice president of sales for Summit Funding Group. “Businesses want to save cash for a rainy day and not spend it on a depreciating asset like equipment. Everyone is in the same boat and hunkering down.”
Summit Funding Group in Mason, Ohio, works with businesses to finance equipment leases. Freeman says leasing helps businesses of all sizes since it helps free up capital.
“Smaller businesses are in survival mode, and leasing is the only way to go for them,” he says. “For larger companies who may have used cash in the past or financed it are looking at leasing as a better option, too.”
Leasing equipment can benefit a company’s bottom line, Freeman says.
“Flexibility is key when leasing since it really helps with cash flow,” he says. “In some cases, companies can get 100 percent financing. When you’re not growing, you’re shrinking; so to get back into that growth mode, you may need to lease equipment.”
Summit Funding works with clients where they’re at, Freeman says, so if a deferred payment structure is better for them – that’s something that can be looked into.
“There are a lot of expenses to get people on the ground and working, and you want to use your available cash to pay employees, not buy equipment,” he says.
There’s another reason companies are taking a harder look at leasing equipment: Payments are fully deductible come tax time. The Internal Revenue Service allows companies to deduct the leasing amount if the equipment is being used.
Another financial benefit is that companies also don’t have a depreciating asset on the books.
When it comes to leasing, Freeman says companies need to careful. “If people tell you something that sounds too good to be true, it probably is,” he says. “Be patient when looking at lease agreements and make sure you understand everything that’s going on.”
Best practices
Once a company decides to lease equipment, the next step is finding the ideal partner to work with. Freeman recommends businesses look to leasing companies that put a high value on personal service.
“You need to know your account manager and think you can work well with him if problems and issues come up,” he says. “You need to be comfortable with the people you’re working with.”
Oil and gas businesses also need to check how much money a lender is willing to give. Freeman says some companies only offer leases worth $1 or $2 million, but with equipment costs going high above that total, “a business can be put into a spot where they have to visit several companies and get money from each of them to get what they need to finish the deal. It’s better if you can find a single company with the capability to cover the entire financing deal,” he says.
Summit Funding, for example, helped a client secure $43 million for three frac spreads using seven different lenders.
“We talked to more than 30 banks to get the funding for the client. Once we secured it, we handled the funding, billing the client and collecting payments directly from the client,” Freeman says. “The client then didn’t have to deal with seven different lenders each month. We saved them time – time they could dedicate to their business.”
Freeman says companies should also look for leasing partners that understand the gas and oil industry, along with its various equipment needs. He says traditional lenders sometimes balk at financing deals since they don’t understand how the industry works. For example, Freeman says a lender understands what a crane is, but doesn’t have a clue how a frac tank is used.
“Without that knowledge, they may say, ‘I’m not sure about the funding,’” he says. “When you work with someone who understands the industry, there’s not that kind of reaction. They know what you need to get the job done.”
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