The oil and gas boom in the United States has brought many hardworking Americans in the Marcellus, Devonian, and Utica shales from rags to riches. While some oilfield service companies have begun to take on additional work, add more crews, and buy more equipment, other companies are left waiting for up to 90 days to get paid on their invoicing. The reason is clear: invoice factoring. Companies that achieve fast growth in the oil and gas sector typically use invoice factoring to manage their cash flow needs.
What is Invoice Factoring
Invoice factoring is the selling of your completed work invoices, or accounts receivable, for immediate cash. Instead of waiting for 30, 60, or even 90 days to receive payments, oil and gas service companies can get immediate cash which gives them the ability to grow without incurring debt or diluting their equity.
Why Invoice Factoring Can Provide Cash and a Bank Cannot
Banks are constrained by internal credit philosophies and federal regulations, which makes it hard to lend to oil and gas service companies. A bank has to examine a company’s strength, while invoice factoring companies focus more on the quality of the collateral rather than credit ratings. This gives them the ability to provide much more cash than a bank can.
How Factoring Works for Oil and Gas Service Companies
In the oil and gas industry, invoice factoring companies quickly offer oilfield businesses cash for completed work. For example, a crude hauling company has completed a job for their customer and creates an invoice for the work. A factoring company will purchase the invoice and pay the crude hauler up to 90% that same day. While waiting for payment, the factoring company will hold the remaining 10% (the reserve) in an escrow account until they receive payment from your customer (the debtor). Once the factoring company receives the payment, you’ll receive the remaining funds less the factoring fees.
What to Look For in an Oil Factoring Company
It would be nice to say that all factoring companies are equal and that any factoring company can be experts in all industries, but that is simply not true. To understand the oil and gas market, a factoring company needs to understand the billing processes and cycles, many of which are accustomed to 30-day payment terms. However, this is not the case when it comes to oil and gas. It’s important to ensure that the factors account manager won’t go into collection mode on day 35 when payment terms are 60 days. This bad practice can jeopardize your relationship with your customer.
It’s also important to realize the benefit of industry knowledge and the ability to adapt to common industry accounts practices to ensure a low increase of workload. It’s healthy for your business to talk to someone who can speak your language. It’s crucial that the factor can think outside of the box and be flexible with accounts payable/receivable processes.
“You have to watch out when selecting an oil & gas factoring company,” says Jens Shkade, President at Integrity Factoring. “There are many factoring companies trying to enter into the oil and gas business claiming their years of experience is transferable. The truth is, oil and gas factoring is different, the factor should be able to understand the different forms of job approvals. Many industries have a large amount of documentation supporting an order or job approval. Oil and gas service companies often get called in by the company men requiring fast action, yet there’s no bid, proposal, or email chain to support the request. The job is completed before A/P is even aware it needed to be done, sealed by a handshake on site, a scribbled signature on your invoice, and a stamp if you’re lucky! You need to know that your factoring company understands what makes these invoices good and that they will stand behind you!”
I’ve Chosen a Factor. Now What?
After a short underwriting period, the factor will welcome you and build your portfolio. You’ll be assigned a new account manager and will now have the time to focus on your work and start growing. A good oil and gas factor will provide excellent back office services such as underwriting a new customer, handling billing issues, and helping with collections. By factoring your receivables, you’ll be able to meet payroll, buy supplies, and pay your bills on time. You can hire more staff to take on more jobs and grow your business as fast as you’d like. While you grow your business you will also benefit from a decrease in your factoring fee, because the more you factor, the better the rate.
Invoice factoring applies to all business sizes and there are many different programs to choose from. A factor should work hard to earn your trust. Watch out for low rate and long-term contract providers. Above all, choose a company that makes you feel comfortable and gives you the ability to completely focus on your work and peace of mind.
Since 2006, Integrity Factoring quickly evolved to be 100% focused on oil and gas receivables. With dedication and hands-on knowledge, we have established a reputation for fast, honest, and reliable service. We have become a leading funding source for many professions in the energy sector. We provide excellent customer service no matter the size of your company. Our goal is to help you grow your business to its fullest potential. If you would like to learn more about products or just have general factoring questions, please call Kevin today at 412-88-0802, or email him at: Kevin@IntegrityFactoring.com.
The Oil & Gas Experts
Kevin Gillespie | SVP Business Development | tel: 412.888.0802
20436 Route 19, Suite 620, Box 162, Cranberry TWP, PA 16066
