Risk is inherent in every business transaction to one degree or another. Accidents happen, companies go belly-up, bosses quit without warning, and a sure-thing becomes a not-a-chance. This is the nature of commerce. While risk can never be completely eliminated, it can be assessed, managed, and mitigated.
Risks Are Inherent in Oil and Gas Excavation
Businesses in the oil and gas sector have a higher tolerance for calculated risk than those in more predictable industries. Though science and technology have vastly improved the oil and gas discovery process, it is not foolproof and will probably never be. This is why oil and gas financing is classified as a high-risk endeavor.
The Risky Business of Oil and Gas Project Financing
A critical risk of oil and gas excavations is less oil discovered than projected. Even when using the latest technology, science, and expertise, sometimes things still go awry when drilling for oil (of course, sometimes there’s more oil to be discovered than originally projected).
Either way, because of the risk and unknowns involved many banks and traditional financing institutions are resistant to provide oil and gas project financing. Small exploration companies with little or no record of success particularly have a hard time securing oil and gas funding. For these reasons and more, alternative oil and gas financing sources such as factoring receivables are being sought out. Invoice factoring companies are more comfortable working with those industries that are generally classified as “high risk.”
What’s the Cost of Drill, Baby, Drill?
While the outcome of a drilling expedition can be unpredictable, what is known is that oil and gas excavation projects are very costly. Oil and gas funding is required to pay for the following in advance:
- Drilling and fracking equipment, pumps, pipes, materials and more
- Payroll for swathes of workers, including engineers, project managers, roustabouts, inspectors, drillers, pipe layers, truck drivers, mechanics, and others
- Freight and vehicles used for the transportation of the oil and gas itself as well as for the materials that are utilized in the fracking and excavation process
- Suppliers that provide the materials, such as the sand, gravel, rock, and water used during the drilling
- Cleaning, maintenance and environmental crews and related vendors
- Drilling permits (state and local) as well as inspections
The catch-22 is that oil and gas industry suppliers must be paid in advance — sometimes months in advance — way before the revenue from the oil and gas discovery is realized. This puts the energy companies — and their suppliers — in quite a bind. Without sufficient oil and gas loans, the drilling project could come to a sputter long before it even begins.
Vendors and Suppliers Also Affected by Oil and Gas Funding Squeeze
The oil and gas funding pinch has a ripple effect on the surrounding industries from suppliers and vendors to workers, truck drivers, freight loaders and more. Providers are well aware of this delicate balance and, looking out for their best interest, have to exercise caution before partnering with oil and gas companies to supply them with the goods and services they need.
Though often overlooked in the headlines, these suppliers and vendors, or secondary businesses, are feeling the pinch of low prices and lack of oil and gas funding. These companies may need additional capital to stay afloat during these waiting periods particularly if they do not want their cash flow to suffer. Invoice factoring companies are a good option for suppliers because they:
- Provide financing based on the value and worthiness of suppliers’ invoices rather than their credit.
- Are able to offer financing in 2-3 days, so suppliers don’t have to worry about meeting payroll responsibilities.
- Are comfortable working in the high-risk environment of oil and gas excavation or the energy sector.
- Can get suppliers cash in a pinch if they are waiting (and waiting) for an oil and gas client to pay.
Suppliers Can Vet a Prospective Client with the Help of a Factoring Company
Oil and gas factoring companies can also serve as a supplier’s personal credit company. That’s because invoice factoring companies routinely run a credit check on a supplier’s prospective clients. A supplier that is worried about the creditworthiness of a possible oil and gas client can have the invoice factoring company vet it to make sure it is likely to pay its bills.
The Slow Down in Oil and Gas Funding Does Not Have to Slow Down Business
So with banks refusing more oil and gas loans, and oil and gas companies falling behind on their bills, other financing option such as factoring receivables are available. Invoice factoring companies can help oil and gas companies — and their suppliers — get the capital they need even if they’ve been turned down by the banks.