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What is oilfield factoring?
As a result of low market prices, many oil and gas companies are struggling to come up with sufficient capital to cover their operating costs. Oilfield factoring is the sale of outstanding accounts receivable at a discount to a third party, such as a financing company or a bank. Factoring is a highly flexible option that allows oil and gas businesses obtain cash within as little as 24 to 48 hours. It relies primarily on the creditworthiness of a business’s clients and does not take into account the business’s own assets or the state of the local economy.
Factoring does not have to be done under a long-term agreement. Spot factoring allows businesses to sell a couple invoices on a one-off basis. Alternatively, in whole-ledger factoring, the factor takes over the business’s entire portfolio of invoices, as well as receivables management.
Factoring can be done on a recourse or non-recourse basis. In recourse factoring, the more common arrangement, the funds are extended for a specified time period, such as one or two months. If at the end of this period the invoice is not collected, the client must replace it with a new, creditworthy one or repay the factor. In non-recourse factoring, the factor outright the invoice outright and becomes responsible for its collection, regardless of how long it takes.
Business Factors is on hand to help you select the best funding option for your business. We have been helping oil and gas service companies grow their businesses since 1999 and have experience servicing businesses in most of the U.S. and Canada. Contact us today for a quote.
Factoring is a highly flexible option that allows oil and gas businesses to obtain cash within as little as 24 to 48 hours. It relies primarily on the creditworthiness of a business’s clients and does not take into account the business’s own assets or the state of the local economy.”
How does oil and gas factoring work?
Oil and gas factoring works in four steps:
- The oil and gas company provides a factor with a copy of the invoice that was sent to the client.
- The factor verifies the invoice and runs a credit check on the client.
- The factor advances a portion of the outstanding amount to the oil and gas company.
- Once the invoice is paid, the factor sends the rest to the oil and gas company minus the discount and any additional fees. The discount and fees are the cost of factoring.
Who can use factoring?
Most companies in the oil and gas industry will quality for factoring as long as they have creditworthy clients. Some examples include suppliers, contractors and consultants in the following areas:
- Exploration and production (E&P)
- Extraction, including fracking
- Transportation, including trucking and pipeline-related services
- Other products and services, such as security and construction
Business Factors routinely works with high-risk or seasonal businesses that do not qualify for a bank loan because they have little in the way of collateral or a short credit history.
What can factoring be used for?
Factoring can be used to fund any working capital need, including:
- Transportation of equipment, such as pipes, tools, haul water, and more.
- Payroll for engineers, chemists, builders, constructors, oil rig installers, movers, and general laborers, such as roustabouts.
- Cleanup, setup, maintenance, and repair of the drilling or fracking site or equipment.
- Costs of permits, licenses and other regulatory matters.
- The purchase of supplies, such as sand, gravel, rock, water and other materials that are needed for drilling or fracking expeditions.
Case study: A diesel supply company in need of cash
A diesel supply company out of Houston, Texas was working with clients that offered 60-day net terms, but it needed to make payroll every two weeks and make tanker leasing payments monthly.
The company factored a few of its invoices under the following arrangement:
- Invoices’ amount: $10,000
- Advance rate: 90%, or $9,000
- Reserve: $1,000, or 10%
- Discount rate: 2.19% every 30 days
- Type of arrangement: Non-recourse
In this scenario, the client pays $219 per month to factor the invoices until they are collected. The total charge would be $438 if the account debtor (the company that owes the money) pays in 60 days. Once that happens, the remainder of the reserve ($562) is returned to the client. Generally speaking, factoring fees depend on a business’s monthly volume, its clients’ credit and the terms, number and amount of the invoices.
Factoring can be used by almost any company in the oil and gas business as long as it has creditworthy clients.”
What are the benefits of using Business Factors & Finance?
Business Factors provides non-recourse factoring of up to 96% of the invoice balance. We use proprietary software to track payment tracks and alert credit executives in real time if a payment is not made.
- Fast oilfield financing in as little as 24 to 48 hours
- Low, competitive fees
- Easy application process with no up-front costs
- Transparent handling of the receivables so you’ll know precisely when payment occurs.
- Non-recourse factoring, meaning that we absorb the loss if the client does not pay
- Advances of up to 96% of the invoice face amount
- Fast, easy setup
- Over 20 years of experience in the freight: telecom, oil and gas, and payroll and staffing industries
- Low fees and complimentary credit checks on your clients
- Available 24/7, 365 days a year
- No upfront fees and simple credit qualifications
- Industry experience: more than $1.2 billion of invoices purchased annually
Within oil and gas finance, factoring is a fast and convenient option for obtaining working capital. Factoring involves the sale of invoices at a discount to a third party, such as a bank or a factoring company. Using factoring, invoices can be monetized in as little as 24 to 48 hours. Factoring can be used by companies in all sectors of the oil and gas industry provided they have creditworthy clients. No long-term agreement is required. Factors can buy invoices on a recourse or non-recourse basis. With recourse factoring, the invoice must be paid within a certain period of time or it is charged back to the client. With non-recourse factoring, the factor takes full responsibility for an invoice’s collection, regardless of how long it takes. Factors do not purchase defaulted invoices and perform credit checks on your clients prior to agreeing to take care of the collection. Contact Business Factors & Finance today to get a quote. We offer advances of up to 96%, with low fees and an easy application process with no upfront costs.
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