Cash in the Barrel: Oilfield Service Companies Between a Rock and Hard Place When Seeking Financing

Many oilfield service companies have major cash flow problems, and it’s not their fault. Most of the big oil and gas companies pay their invoices in 30-90 days. Many oilfield service companies don’t have the cash reserves to wait for those payments; they have their own obligations to meet. Oilfield service companies have high cash demands and slow turnaround times, and business owners feel it where it hurts-their pocket books. This puts oilfield service companies between a rock and a hard place.

At first glance, it would seem that the company should open up a traditional line of credit so they can pump working capital into the business as needed. In principle, this is a great idea. Getting a traditional line of credit is very difficult for many oilfield service companies because most banks require substantial collateral, clean balance sheets, and long successful histories. In reality, few oilfield service companies meet those criteria. But, there is a solution. Invoice factoring.

Accounts receivable financing, or factoring has gotten a bad rap-and rightfully so. When this method of financing started becoming popular in the US, many factoring companies took advantage of growing businesses that were vulnerable and were charging sky-high rates and running off their customers with aggressive collection practices.

Today, invoice financing has a whole new face and is much more business friendly.

Invoice factoring allows business, such as oilfield service companies, to capture revenues that would have been locked up in slow payment of invoices. Factoring reduces the time it takes your business to get paid, so you can stay current on payroll and payables.

There are three main benefits of invoice factoring for oilfield service companies:

1. Predictable and reliable cash flow: The business’ cash flow improves immediately as invoices are created and sold.

2. Increased sales: Flexible credit terms give the business a competitive edge in its marketplace. Predictable cash flow allows more sales to large but slower paying customers.

3. Reduce debt and fund growth:The proceeds from the sale of invoices can be used to pay off debt, take cash discounts on purchases, acquire inventory, or capitalize on growth opportunities.

The way invoice factoring works is quite simple: the factored invoice proceeds are sent to the business in two installments. The first installment (usually 90% of the face value of the invoice) is sent to you within 24 hours after submitting the invoice to the factoring company. The second installment, also called the reserve, is remitted to you, less the factoring fee, when your customer pays the invoice.

Factoring companies don’t look at your business’ credit, but they look at the credit worthiness of your customers. Businesses that have tax liens, recent bankruptcies, or debtor-in-possession even qualify invoice financing.

Invoice factoring is the perfect tool for stability and growth in oilfield service companies. Factoring lines are designed to increase as your sales grow and self-liquidate as they cool off, which helps smooth the cash flow cycle through periods of price volatility.