Oil and gas factoring is a funding option that increases cash flow. The way it works is that oilfield factoring firms fund unpaid client invoices immediately after they are collected. This allows the oil and gas firm to stay focused on expanding its operations while the oilfield factor awaits the clients’ payments.
Here is how it works
Generate client invoices. This can be a private company or state contract, or incremental account receivable. It can be an earning statement or anything that represents an earned but unpaid invoice.
Factor the earnings statement or invoice with a giant oilfield factor and get instant funding on up to 98% of the invoice (deposit) for a small fee. In most cases, the fee is about 2-5% of the total invoice amount.
Once the clients make payments, you will get the amount remaining in reserve.
Reasons to choose oil and gas factoring
If you are in the oil and gas business, you will realize that invoice factoring is a business-friendly option to bank loans. There is zero debt to repay since it’s not treated as a loan, and it fits the cut -and- thrust-buy-and-sell transactional type of oilfield industry.
Every invoice it’s a separate deal with unique terms. Your invoice or account receivables are sold to a factor that advances you a good portion of the amount owed to make sure that you have sufficient working capital.
Moreover, the factoring firm follows up on payment from the debtors, allowing you to concentrate on the business. You can opt to factor in some of your invoices or all of them; you have the flexibility to choose. Additionally, you have the liberty to use the funds as you please, without the need to justify the spending to a financial institution or investors.
Oil and gas factoring
Fresh business opportunities are the hallmark of any business. When you discover gas or strike oil, it’s important to move faster and scale up with equipment and workers to make sure you meet all other opportunities head-on. There are numerous oilfield service companies handling lucrative projects. These companies can’t afford to wait for clients to pay for the job.
Firms that need oil and gas factoring comprise consultants in exploration and production, extraction contractors and refining suppliers. Other sectors like trucking, construction and security can also benefit from invoice factoring.
Note that a factoring company must assess the creditworthiness of your clients for your business to qualify for oil and gas factoring.
If your customers have good credit ratings, then funding you against the guarantee of the unpaid invoice means it’s a win-win situation for everyone. The oil and gas industry entails several short-term contractor projects and expenses that spike at a particular stage of the project. This makes it hard to manage available cash flow.
When starting, there are set up expenses such as permits and buying suppliers. There are also maintenance, repair and clean-up expenses. Cash flow management can be challenging if you get paid after two months, but you need to pay workers every two weeks.
Who benefits from oil and gas factoring
Companies in the oilfield industry are leveraging the benefit of convenience offered by factoring. Additionally, companies that offer oilfield equipment rental, road construction and pipeline, acidizing and cementing, and environmental clean-up are reaping the benefits of oil and gas factoring.
The list is endless, from welders to land surveyors. Therefore, irrespective of the size of the company, even new businesses with poor credit ratings, there is a better chance of qualifying for oil and gas factoring. Your customers are liable for paying the invoices.
Notable benefits of factoring
- By credit scrutinizing your clients for you, factoring forms ensures your business with quality clients
- Smooth cash flow to allow better financial planning
- Frees up time to concentrate on expanding your business
- Your oil and gas company is protected against bad debtors
- Funds are released within a few hours, offering working capital for the next project
The secret is to choose a reliable factoring firm that understands how to handle clients in a proper way. But the daily, upfront activities are your tasks to handle, it’s only the awards conversation, such as “when do we get payment” that you won’t have to worry about.