Any roustabout or hotshot driver can tell you that everything moves faster in the boom-or-bust oilfield industry. Everything, it seems, but the payment cycles.
Companies that serve oil rigs in Texas, North Dakota or Pennsylvania must wait as long as 60 to 90 days to receive payments from their customers. That length of time can make it nearly impossible to build up cash flow, especially for start-up trucking fleets hauling water or sand to well sites.
The best way to generate working capital in the oilfield services industry is through factoring. Also called “accounts receivable financing,” factoring turns your invoices into cash in 24 hours or less. That quickly generates the working capital needed to catch up on bills, pay owner-operators, and buy any equipment necessary to keep up with the next oil and gas boom. Oilfield pros who operate their companies without financing can take years just to build up a fleet of four or five trucks. Companies that use factoring as a way to increase cash flow can expand operations at a much quicker pace.
Below are the key ways that factoring can help you maintain and grow a successful oilfield services company. To learn even more, download Your Complete Guide to Factoring on the RTS Financial website.
Factoring allows your company to receive payment for its services almost immediately. A factoring company buys your invoices, then advances cash on those invoices in less than a day. Some factors advance as much as 90% of an invoice’s value, then pay the balance due once your customer pays them. The factor withholds a small fee for assuming the collections risk.
Some companies choose to generate cash through Quick Pay financing. However, payments through Quick Pay can take three to seven days to process. Factoring takes less than 24 hours. The fees for Quick Pay tend to be higher and not all freight brokers offer a Quick Pay solution. Relying only on Quick Pay to finance your receivables could limit the number of brokers your company can work with.
It can take weeks or even months of paperwork to get approved for a line of credit from a bank or other traditional lenders. With most factors, your oilfield company can set up an account and start funding receivables in less than a week. One advantage of factoring is that even companies that are new or have a low credit score can qualify for financing. Your factoring provider will be more concerned about your customers’ credit and payment histories. Another benefit of factoring is that it is not a loan. Your company does not assume any debt when it factors.
When selecting a factoring company, it is important to find one that uses up-to-date online software. Some oilfield factors still require original invoices and other documents to be mailed in before they will buy them. This creates additional time and hassle. Finding a factoring company that has a system in place to receive and approve scanned invoices is crucial. Many factors today also use online software that allows you to review your funding transactions in real-time, from any location.
In addition to boosting cash flow, factoring can take a lot of work off of your company’s plate. Many factoring companies provide a range of back-office services, including customer collections and free credit analysis. The best factors provide a level of service that streamlines the collections process for your company and your customers. They understand that collecting payment in a prompt, professional manner is in everyone’s best interest.
The back-office services a factoring company provides can make a real difference to your company’s bottom line. You no longer have to spend time and resources on collections, allowing you to focus more effort on running and expanding your oilfield services business.
Discounts and Other Services
Some factors provide additional programs that can help oilfield fleets improve their bottom lines. Fuel cards, exclusive load boards and discounts on other services like lodging or paperwork are some of the additional perks your company might receive by factoring.
Factoring is more flexible than most forms of traditional financing. The amount of money your company can finance through factoring will grow as your receivables grow. The funding should never run out. For example, if your company’s monthly volume of invoices increases from $100,000 to $500,000 in a year’s time, factoring should be able to fund that growth.
Some factoring companies have stronger financial resources than others. When selecting a factor, be sure to ask the company’s representatives about their capital structure and customer base. Factors that have been in business for many years and are familiar with the oilfield services industry are the best bets to finance your company as it grows.