Oil and Gas Factoring Explained

Over the last several decades, the oil and gas industry has grown at a steady to exponential rate. This has attracted tons of companies to line up businesses serving the big oil companies and means there’s a promise to enjoy success and security for several years to return. Companies are wanting to explore new sites, and advancing technology and political advocates are facilitating this growth.

Various shifts within the global economy have led to a somewhat volatile market and economically conservative approach on the part of the massive oil and gas companies. Many of those clients prefer longer terms, and they might need to make payments later than they could have within the past. Companies still get paid after they invoice clients, but such payments might not come quickly enough to satisfy the financial needs of these companies who work with the massive oil companies.

While some oilfield service companies have begun to require additional work, add more crews, and buy more equipment, other companies left expecting up to 90 days to get paid on their invoicing. The explanation is clear: oil and gas factoring. Companies that achieve fast growth within the oil and gas sector typically use oil and gas factoring to manage their income needs.

Oil and gas factoring is the selling of your completed work invoices, or assets, for immediate cash. Rather than expecting 30, 60, or maybe 90 days to receive payments, oil and gas company companies can get quick money, which provides them the ability to grow without incurring debt or diluting their equity.

The factoring process works more quickly and simply than most traditional methods. A business submits invoices to an invoice company. The factoring company pays business cash for about 80% to 90% of the entire value of the submitted invoices. Once an invoice gets paid, then the factoring company pays the remaining balance to the business.

Applying for traditional financing via a banking institution isn’t always a feasible strategy for companies that serve the oil and gas industry. Banks constrained by internal credit philosophies and federal regulations, which makes it hard to lend to oil and gas company companies. A bank has got to examine a company’s strength. This is often why oil and gas factoring may be a practicable alternative for such businesses. Oil and gas factoring enables a business to access cash immediately rather than waiting a month or two for invoices to be paid. From the littlest company supplying lunches to the oil field work crews to the businesses that provide the labor to examine the oil thoroughly, factoring is often an excellent alternative funding solution.

To understand the oil and gas market, a factoring company must realize the billing processes and cycles, many of which are familiar with 30-day payment terms. However, this is often not the case when it involves oil and gas. It’s essential to make sure that the factors account manager won’t enter collection mode on day 35 when payment terms are 60 days. This lousy practice can jeopardize your relationship with your customer.

It’s also essential to understand the advantage of industry knowledge and, therefore, the ability to adapt to standard industry accounting practices to make sure a low increase in workload.