Oil and gas companies operate in an environment where financial challenges are regular and often inevitable. These businesses need an easy solution that they can turn to at those moments when the cash flow becomes constrained. Oil and gas factoring is the exact solution they need. It is a financial strategy that offers immediate liquidity without the need to apply for any loans. It works by converting unpaid invoices into working capital.
Why Cash Flow is a Challenge for Oilfield Service Companies
The oil and gas industry is among the most volatile sectors in our economy. Fluctuating markets, long timelines, and extended payment cycles are normal for businesses in this industry. This means that companies often find their finances under severe pressure – not because business is bad, but because of these operational difficulties. Cash flow issues can arise at any time, as long gaps emerge between invoicing and payment, without any corresponding let-up in running costs. It is important to know how to manage cash flow in the oil and gas sector so your business can navigate these periodic rough patches.
The Impact of Delayed Payments on Operations
When payments are delayed, but running costs keep coming as usual, it is only a matter of time before your cash flow starts to dry up. As you wait for payments to come in, you still need your business running. You need to pay salaries, keep your equipment running, and ensure that production continues. You can’t afford to wait until those payments finally come in; you need cash as soon as possible.
How Factoring Helps Cover Payroll and Expenses
Invoice factoring is the perfect solution to cash flow problems experienced by businesses in the oil and gas industry. When your business experiences problems with its cash flow, you can choose to factor your receivable invoices, meaning you would sell them to a factoring company, which would then advance an agreed percentage of the invoices’ total value to you. The factor then collects payment from your customers on your behalf and pays the outstanding balance to you after collecting a factoring fee. This strategy means you can turn your accounts receivable into instant cash.
Common Cash Flow Mistakes Oilfield Businesses Make
The volatile nature of the industry means that oil and gas cash flow errors are rather easy to make. Even with the difficulties and vagaries of the sector, businesses can still keep more cash flowing by avoiding the following common mistakes:
- Keeping inadequate cash reserves
- Neglecting to do regular cash flow analyses and regulating spending accordingly
- Allowing longer payment deadlines
- Improper inventory management
- Improper collection practices
- Slow invoicing
- Unclear payment terms
- Underestimating expenses
How Oilfield Invoice Factoring Solves Financial Challenges
The benefits of oil and gas factoring arise from its ability to allow fast and ready cash flow without incurring any debt.
Accessing Quick Capital Without Debt
Without having invoice factoring to turn to, you may instead consider applying for a bank loan to fill your current cash gaps. While you may be successful in this attempt, there are costs involved. You have to put your business into debt, which will affect your future cash flow (as a result of loan repayments), as well as your credit history. Plus, the application process can often take too long, meaning you can’t get the instant cash injection your business needs.
Managing Accounts Receivable for Stable Cash Flow
Since you likely allow relatively long payment terms on your invoices, you probably sit for at least 30 days after issuing invoices, waiting for your payments to come in. Factoring empowers you to take control of your accounts. You can issue an invoice and convert it into cash instantly. You wouldn’t need to change your billing times or procedures, or inconvenience your customers.
Reducing Dependence on Traditional Loans
There may still be times when you will need to apply for a traditional loan, but with factoring, you can reserve that need for real emergencies or periods of major expansion. For the day-to-day running of your business, factoring can provide a fast, debt-free solution.
Choosing the Right Oilfield Factoring Company
If you feel the time has come to factor your invoices, you need to start by choosing the right partner. There are many businesses out there offering factoring or similar financial services. Make sure you deal with one that is efficient and reputable.
Key Factors to Consider Before Partnering
When looking for a factoring company, look for the following:
- Industry expertise: There are many factoring businesses that work in many different industries. You need one that understands the demands of the oil and gas sector, and can tailor their services accordingly.
- Good reviews: Don’t decide on a factor until you have done some background checks. Ask other businesses who have used their services, or read customer reviews.
- Advance rates: Find out what kinds of limits a factoring company places on its advance payments (the payments they make to you upfront after you send your invoices). Make sure these rates suit you. Better yet, find a company that offers flexible rates and is willing to negotiate.
- Fee structures: Ask about the company’s fees, and make sure you get thorough, transparent answers. There should be no hidden costs, you should know exactly what you will be expected to pay before you start, and these fees should be reasonable in terms of your budget and the value you are receiving.
Steps to Get Started with Oilfield Factoring
Oil and gas factoring is extremely easy to do. You don’t need to have a great credit history – in fact, we do not even consider your credit history. What we do focus on is your clients’ credit history, since the return on our financial output depends on their ability to pay your invoices.
To get the process started, all you need are some invoices you want to convert into cash. Then, simply fill out our online application form, and we will get back to you within 24 hours. Once you are approved, you can begin factoring your invoices. You can get your cash flowing again by making Oilfield Factoring your partner in oil and gas factoring.
