Factoring for Oilfield Transportation Companies

Summary: Oilfield transportation companies handle some of the most difficult loads in the transportation industry: heavy haul, oversized, chemicals, and specialized fluids. Additionally, companies often provide storage facilities as part of the services. The complexity of their services makes oilfield transportation companies difficult to operate.

Managing the company’s cash flow can be as challenging as the loads they haul. They suffer the effects of the boom-and-bust cycles of the oil and gas industry. It’s common for small and growing companies to experience cash flow problems at one point or another. Fortunately, companies can be very profitable when cash flow is managed correctly.

This article discusses the most common cash flow problem that affects oilfield transportation companies. It also provides a set of solutions to solve the problem once and for all. We cover:

  1. A common source of cash flow problems
  2. Are invoicing and collections working well?
  3. Consider early payment discounts
  4. Financing options
  5. Conclusion

1. A common source of cash flow problems

There are several reasons why companies have cash flow problems. However, if your company is profitable but has poor cash flow, the most likely explanation for your financial problems is slow-paying accounts receivable.

To understand this problem, let’s first look at the expense side of the business. Oilfield transportation companies often have large recurring expenses that must be paid regularly and on specific dates. These include rent, salaries, insurance, fuel, lease payments, rent, etc. Furthermore, due to the nature of the industry, these expenses are usually higher than those of conventional trucking companies.

On the other hand, revenues are not always regular and usually flow slowly. Companies typically give their clients net-45 to net-60 days to pay an invoice. Your income may be higher than expenses, but the income flows more slowly. The company is profitable but cash poor. This situation puts your company in a financial bind, forcing it to use its cash reserves to pay ongoing expenses. It also leaves the company vulnerable to financial problems.

A company can encounter problems due to slow-paying invoices for the following three reasons:

  • Invoicing and collections problems
  • Offering credit to the wrong customers
  • Growing too fast

Fortunately, solving this challenge is not difficult. This article offers a methodical approach, which is the most effective way to solve this problem. The first step of this strategy is to examine your invoicing and collections.

2. Invoicing and collections

Every business owner recognizes the importance of having good cash flow. However, many owners pay attention to their invoicing and collections only when they have financial problems. Having a well-organized invoicing and collections group helps you avoid many issues and is key to running a successful business.

Examine your Accounts Receivable Aging Report to determine how your clients are paying. Most invoices should be paid within terms. Having many clients pay beyond terms is usually a sign that you have problems in this area. The following approach works well for most companies:

  • Offer terms only to clients with good commercial credit
  • Invoice promptly and include all paperwork
  • Verify that the invoices were received
  • Call clients if they are a few days beyond terms
  • Always be professional and courteous

It’s important to be disciplined in your collections efforts. Also, keep in mind that you can avoid most problems by offering payment terms only to clients with good commercial credit. For more information, read “How to Collect Slow-Paying Invoices.

Some companies may still have cash flow problems even with invoices that pay on time. In this case, the next step is to give your clients an incentive to pay sooner. You can do this by offering an early payment discount.

3. Offer early payment discounts

Early payment discounts are the easiest way to get clients to pay quickly. As the name implies, you give a discount to clients who choose to pay their invoices quickly. In most cases, clients get a 1% to 2% discount if they pay within ten days. Otherwise, the client must pay the total amount on their usual terms.

Early payment discounts can be a great way to improve your cash flow and client satisfaction at the same time. Offer this benefit to your best clients – those that pay on time. Avoid offering discounts to clients with a bad payment record since it seldom resolves the payment problems.

Lastly, keep in mind that early payment discounts are an incentive and, therefore, optional. Clients take advantage of the discounts only if it’s beneficial to them. It’s common for clients to stop taking these discounts when the economy takes a turn. Unfortunately, this is also when you need fast payments the most.

If offering early payment discounts does not solve your cash flow problems, the next step is to consider financing. Oilfield transportation companies have a couple of options which we discuss in the next section.

4. Financing your invoices

In most cases, the best solution to solve cash flow issues is to use an accounts receivable line of credit. This financing is a great option for oilfield services companies. These lines of credit provide benefits similar to those of a conventional line of credit, but they are more flexible and are easier to obtain.

Companies that invoice less than $200,000 per month should consider using freight factoring. Companies invoicing over $200,000 per month and with well-managed billing departments should consider sales ledger financing.

a) Freight factoring

Freight factoring is a specialized form of factoring for the transportation industry. It enables you to sell your invoices from creditworthy clients to a factoring company. The factor pays for the invoice immediately, which provides you with instant working capital. This solution works well for small or growing oilfield services companies.

In most cases, factoring companies can advance up to 90% of the invoices as soon as they buy them. Your company gets the remaining 10%, less the cost of factoring, once your client pays for the invoice in full. The transaction settles at that point. To learn more, read “What is Freight Factoring? How does it Work?

In general, rates range from 1.15% to 3% per 30 days. The cost of factoring is determined by the credit quality of your invoices, your sales volume, and the length of time your clients take to pay.

Qualifying for factoring is relatively simple. Your transportation company must:

  • Have creditworthy commercial clients
  • Not have any liens against its invoices
  • Be well managed

b) Sales ledger financing

Companies that invoice over $200,000 per month and have well-established invoicing and collections departments should consider sales ledger financing. The solution is designed to work much like a revolving line of credit.

The finance company assigns a credit limit based on a percentage of your accounts receivable, usually around 90%. The credit limit adapts based on your open receivables. When you need funds, you make a draw. The line is paid off as your clients pay their invoices on their usual terms.

Costs are competitive and are based on a Prime Rate + “X%” model. The percentage over the prime rate is determined by the size of the opportunity and the quality of the accounts receivable.

5. Conclusion

In most cases, profitable companies with cash flow problems usually have funds tied to slow-paying accounts receivable. The best approach to solving this problem is ensuring that invoicing and collections are working well. Use early payment discounts if improving collections does not solve your problem. Lastly, use financing if the previous two options can’t meet your requirements.

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