For the past few years the oil and gas industry has grown substantially, especially in the area of hydraulic fracturing (also known as “fracking”). This growth has created an important business opportunity for oilfield transportation companies. Many entrepreneurs have launched their own companies and have begun servicing oil companies with great success.
Cash flow problems?
However, with rapid growth usually come challenges. Many transportation companies that grow quickly usually operate with tight cash flows. This situation becomes more challenging because most oil and gas customers pay their invoices in 30 to 60 days. While larger companies can often afford to wait that long for payment, smaller and growing companies usually need to be paid sooner so that they can meet their own obligations, such as fuel, vacuum truck maintenance, vehicle maintenance, salaries, and repairs.
Asking for quick payments can work
Some transportation companies have tackled this problem by asking customers for prompt payments. They commonly use the industry practice of offering a 2% discount to customers that pay in 10 days or less.
While this strategy can work very well, it also has some drawbacks, one of which is that your cash flow will ultimately depend on your customers’ willingness to take a discount in exchange for a quick payment. If they change their minds and revert to old payment habits, your company could be in trouble. For many oilfield transportation companies, a better solution is to use invoice factoring.
Invoice factoring improves working capital
Invoice factoring accelerates the revenues tied in slow-paying accounts receivable. This solution provides your company with the cash flow it needs to meet its obligations and, more importantly, to take on new customers without worrying about slow payments.
How does a transaction work?
The transaction works by using an intermediary – a factoring company. The factor handles all funding advances while using your invoices as collateral. They also handle settlements and close transactions once your customers pay on their regular schedule. Most factoring transactions are structured as the purchase of an invoice in two installments. The factoring company pays you the first installment – usually for 90% of the invoice (this varies) – as soon as the work or load is accepted by the customer. Once your customer pays, your company receives the remaining 10% (less the factoring fee) as a second installment.
This type of transaction is fairly common and can be used by most oilfield transportation companies.
Can your company qualify?
Factoring programs usually have simpler requirements than most conventional business financing solutions. The most important requirement is that your customers have good commercial credit. Fortunately, most of the larger players in the oil and gas industry have solid commercial credit. Additionally, your company should meet the following criteria:
- You must invoice only for delivered and accepted loads
- Your invoices must be unencumbered by liens
- Your company must not have any legal or tax problems
- Company owners must have industry experience and good reputations
Grow your business – use factoring strategically
Most companies use transportation factoring on an ongoing basis. They factor a sufficient portion of their receivables to ensure that they have the cash flow to meet current expenses.
However, the financing line can be used strategically because, unlike most traditional financing lines, it does not have a limit. The line can grow, alongside your revenues, as long as your receivables are factorable. This flexibility makes invoice factoring an ideal option for growing oilfield transportation companies that have great opportunities but are held back by cash flow problems.
Get more information
We are a leading factoring company and work with oilfield transportation companies. For information, get an instant quote or call (877) 300 3258.