The oil and gas industry has been booming in recent years, creating important opportunities for entrepreneurs who start companies that specialize in oilfield services. Companies that specialize in pipeline construction and maintenance have reaped the rewards of this increase, especially those located in Alberta, Saskatchewan, and in most areas in the Canadian oil patch.
However, many companies in the oilfield services industry will encounter cash flow problems at one time or another. In part, the reason for these problems is that these companies are often started by entrepreneurs who have a lot of industry knowledge but don’t have a lot of capital. They can easily get into trouble, especially if they are expanding quickly.
Fast growth can bring financial problems
Fast growth can create problems for companies that are not well funded and have not built a cash reserve. Most of the problems originate from the fact that oil and gas customers often pay their invoices in 30 to 60 days. Most well-established companies require credit terms as a condition of doing business. However, this requirement impacts smaller pipeline construction companies who have ongoing expenses that must be paid – preventing them from offering credit.
This dilemma leaves you with two undesirable options: you can stop growing the company while you build a better cash reserve, or your can keep growing and hope that you don’t experience problems. Both options are bad.
A better option is to factor your invoices. This solution improves your cash flow and enables you to focus on growing your company without the limitations imposed by slow-paying customers.
Financing growth through factoring
If you look at the problem, it’s fairly simple. Your clients pay slowly and you need them to pay sooner. You can accomplish the same result by using factoring. Factoring provides you with immediate funds that can be used to pay your employees, suppliers, and other expenses.
Factoring minimizes the challenges of working with slow-paying clients and provides a solid financial base that can be used to grow your company. When used correctly, factoring can be an effective tool to finance oilfield services companies.
Advantages of factoring
An invoice factoring program has many advantages over conventional financing solutions. The main advantage is that the line is flexible and can grow with your pipeline construction company. The line can increase to match your billings, providing a platform of financial stability.
Additionally, the line is easier to get than conventional business loans and lines of credit. This accessibility makes factoring an ideal option for new and growing companies that are not well capitalized.
How does factoring work?
The actual transaction is relatively simple. Your invoices are financed in two instalment payments. The first payment – the advance – is provided as soon as the project, or project segment, is completed and accepted by your client. The advance usually covers about 80% of the invoice.
The remaining 20% is rebated as soon as your client pays the invoice in full. The fee for the service is often deducted from the rebate. You can learn more about factoring by reading “What is Factoring Financing?”
What determines the factoring rate?
The factoring rate is often determined by the size of your invoices, the credit quality of your clients, and the general risk of your project. The charge is assessed by discounting the invoice based on a percentage. Rates range from 1.5% to 3.5% per 30 days.
How does my company qualify?
Getting a factoring financing solution is comparatively easy. Most factoring companies are used to working with companies that are growing quickly and may not have the best financial statements. The most important requirement is to have creditworthy invoices because these invoices secure the transaction.
Aside from that, your company should:
- Not have encumbered accounts receivable
- Be free of major tax or legal problems
- Be managed by experienced individuals
Get more information
We are a leading provider of factoring financing to companies in the oilfield services industry. For more information, get an online factoring quote or call us toll-free at (877) 300 3258.