When your gas and oil business experiences cash flow problems, you have two possible solutions: you can either apply for a loan from your bank, or you can factor your accounts receivable. There are benefits and drawbacks to both options, and the one you choose depends on your unique circumstances. Let’s consider the pros and cons of a business loan vs. invoice factoring and see which one suits you best.
Oilfield Factoring vs. Traditional Bank Loans: Key Differences
First, let’s take a look at the key differences between factoring and bank loans.
How Each Option Impacts Cash Flow and Business Growth
Both loans and factoring can serve as effective solutions to cash flow problems. The major difference is that factoring provides faster cash injections, while loans require a longer application and approval process. In addition, factoring can provide an ongoing source of cash flow augmentation, while a loan provides a single cash injection. A substantial loan could be great for your business growth, as it can provide an immediate and sizeable increase in capital, which can be used to fund growth and investment. However, factoring can do the same over a longer term and without charging any interest.
Comparing Approval Times and Requirements
Bank loans have a lot of red tape and usually a long list of qualifying criteria. You need to have a good credit score; you may need to offer some kind of collateral, and there are usually plenty of forms to fill in. After going through this lengthy procedure, your application may not even be approved. With factoring, the process is quick and easy – it often takes less than a day to get approval. In addition, there is far less paperwork, and your credit score is not a factor. We will need to check your clients’ credit histories, however.
Interest Rates vs. Factoring Fees: Which is More Cost-Effective?
Borrowing money can be quite expensive, as you will need to pay back what you have borrowed with interest. Factoring also comes at a cost, but it can be much more manageable, Your factoring company will charge you a fee for each invoice you factor, amounting to a certain percentage of the total value. This fee will be deducted after your client pays the factor and before the factor pays the balance over to you. Depending on the company you work with and the deal you have in place, factoring fees can sometimes be higher than the interest you would pay on a loan. However, you have much more control over the process. You can select the invoices you wish to factor, which means you can strategize your factoring so that you can manage the costs and make them fit your budget and business plans. This is not something you can do with a lump-sum bank loan, where you simply have to accept the interest rate that the bank prescribes. The relative flexibility of factoring, therefore, can make it much more cost-effective in the long run.
When to Choose Factoring Over a Bank Loan
Factoring is a much faster and more efficient solution than a bank loan, and it also provides a number of financial benefits that bank loans generally don’t offer.
Why Small Businesses in Oil and Gas Prefer Factoring
Small businesses in the oil and gas industry choose invoice factoring. The benefits of oil and gas invoice factoring include the following:
- Credit checks: Factoring companies check the credit histories of your customers. This ensures that you and the factoring business stand a better chance of getting paid. This is a service that no bank offers.
- Smooth long-term cash flow: Factoring streamlines your cash flow to allow for better financial planning.
- Outsourced administration: When you partner with a factoring company, you hand your sales ledger and collection duties over to them. This frees you up from doing these administrative tasks so you can focus on your core business.
- No debt: With a factoring company, you don’t incur any debt. Factoring is not a loan; instead, you essentially sell your invoices to the factoring company.
- Fast cash injections: When you submit an invoice for factoring, you will receive your cash within a matter of days – at times, it may take less than 24 hours. Bank loans take much longer to process.
Finding a Reliable Oilfield Factoring Partner
If you decide to go with factoring rather than a bank loan, it is important that you choose a factoring partner you can trust, and that understands your industry.
Evaluating the Best Factoring Companies
When you begin your search for a reliable factoring company, begin by reading customer reviews and asking other businesses in the industry for referrals. Look for a factor that is known for excellent customer service, flexible terms, and excellent knowledge of the oil and gas industry.
What to Look for in a Funding Agreement
Once you have chosen the best factoring company, examine their agreement very carefully before you sign it. Keep a careful lookout for factors such as:
- Advance rates, i.e., how much does the company advance to you when you send your invoices for factoring? Is this a consistent factoring rate, and does it suit your business needs?
- Fees: What fees will they charge you for doing business with them? Most importantly, are all these fees disclosed upfront? Be sure to ask if there are any fees that are not included in the agreement. These could include cancellation fees or administration fees.
- Is it recourse or non-recourse factoring? In recourse factoring, you would have to pay for any invoices that your clients don’t honor. With non-recourse factoring, the factor takes on that risk.
- Minimum volume requirement: Does the factor require you to submit a minimum number of invoices each month? Make sure that their policy in this regard is suitable for your business before you sign the contract.
If you have weighed up the pros and cons of a business loan vs. invoice factoring, and would like to work with a factor that understands the challenges of the oil and gas industry, reach out to Oilfield Factoring. You can start the process by filling out our online application form.
