How to Finance an Oilfield Services Company

One of the advantages of working for the oil and gas industry is that most customers have excellent commercial credit and are very good payers. This advantage, coupled with strong demand, has created an ideal situation for companies in the oilfield services industry. Companies in service industries such as oilfield transportationpipeline construction and maintenance, and others have seen their revenues increase dramatically.

Working capital problems

However, fast growth can create cash flow problems, especially for small companies. The main problem is that most large companies pay invoices on net-30 to net-60 day terms. Small companies have to accept these slow payment because their clients demand it. They don’t have much choice. But if they don’t have the reserves to cover expenses while waiting for payment, they will encounter problems. And, if not managed properly, these problems can become serious issues.

Ask for faster payments

One way to mitigate this cash flow problem is to ask clients to pay invoices faster. This technique can bring immediate results. However, most customers request a discount – usually around 2% – for paying quickly.

There are two problems with this strategy. First, some of your clients may think that your company has financial difficulties. Second, it does not guarantee more reliable working capital in the long run because your oil and gas customers could simply revert to paying slowly at any time.

A better solution

One way to improve your cash flow without asking your clients to pay sooner is to finance your invoices. This solution can provide you with immediate funding for your slow-paying receivables. Financing invoices improves your cash flow and enables you to operate your business. More importantly, it allows you to offer payment terms to clients while minimizing the problems associated with slow-paying customers.

A simple transaction

The transaction is relatively simple and uses a financial intermediary called a factoring company. You invoice your customers on a regular basis and the factor advances funds to your company by funding your invoices. Most transaction are done in two instalments: the advance and the rebate.

The advance is funded as soon as your company has completed its services. This instalment often covers 80% of the invoice, though this amount varies. The rebate is funded once your client pays for your services in full on their usual schedule. The cost of a factoring transaction varies based on your sales volume, invoice diversity, and customer creditworthiness. The cost averages 1.5% to 3% for 30 days of funding.

For more information, please read “How does factoring work?

Clear benefits

Using factoring improves your cash flow fairly quickly. Additionally, the line is indexed to your sales and grows as your revenues increase. This flexibility is the primary benefit of invoice factoring because it supports your growth.

The financing limit of the line is often determined by the quality of your invoices, their dollar value, and your ability to service your client. This benefit makes factoring an ideal alternative for small companies with growth prospects that have been slowed by cash flow issues.

Easy qualification

Invoice factoring has simple qualification requirements. The most important requirement is that your commercial clients reliably pay their invoices in net 30 to 60 days. This is because the quality of your invoices is what determines the financing limit of the line. Additionally, your receivables should not be encumbered and your company should not have serious tax/legal issues.

Quick funding

Another advantage of invoice factoring is that the line can be deployed quickly, often in days. The first funding can be done within five to ten days of your initial application, if all goes well. Subsequent transactions can be handled in as little as one business day. This rapid turnaround makes factoring an ideal option for oilfield service companies that have cash flow problems and need immediate funding.

Get more information

We are a leading factoring provider in Canada and can offer competitive financing plans to oilfield services companies. For more information, call (877) 300 3258 or get an online factoring quote.