Oil and gas factoring is a type of asset-based lending. Asset-based lending allows you to use your assets, such as accounts receivable, equipment, or inventory, to obtain working capital for your business. Oil and gas factoring is similar but geared specifically for the oil and gas industry.
Simply put, oil and gas factoring is an advance of funds to a company by a factoring company against invoices that have been raised but not yet paid.
Factoring is not a loan. It’s a purchase of a company’s invoice by an oil and gas factoring company at a discount. Oil and gas factoring companies advance money against the value of your payables and take over your credit risk management, freeing up your staff to focus on other areas of business.
How Does Oil and Gas Factoring Work?
All companies in the oil and gas industry need constant access to capital to operate their businesses. Whether you are an oil field services company, a supplier, or a producer, the chances are that your customers take up to 60 days to pay their bills. If you do not have access to cash in the meantime, how will you pay your own expenses?
Oil and gas factoring solves this problem by allowing you to sell your open invoices for immediate cash. The factor then collects payment from your customer when it is due. This will enable you to get paid today on work done weeks ago effectively.
Because oil and gas factoring is asset-based lending and not traditional bank financing (based on credit), approval is based on the quality of your invoices rather than your credit score. This makes it easy for many companies in the industry that cannot qualify for traditional loans or lines of credit.
How Does Factoring Benefit Gas and Oil Companies?
Fast access to cash
When working in the oil and gas industry, you need fast access to cash in order to fund your business. When waiting for customers to pay their oil and gas invoices, it can be hard to keep up with expenses such as paying your employees, buying materials, and purchasing equipment. This can put your cash flow under strain. However, an oil and gas factoring service can help take the pressure off your shoulders.
Once you’ve raised an invoice for services or products that you’ve provided to a customer, an oil and gas factoring service can advance up to 90% of the value of your invoice straight away. This way, you’ll have the extra cash flow to work with until the invoice is paid. When your customer pays the invoice in full, the company releases the remaining 10% less their fees.
Oil and gas factoring is a specialized finance service for companies in the oil and gas industry. Factoring helps oil and gas companies grow by providing upfront capital for their invoices. This allows them to obtain cash quickly from the sale of their receivables instead of waiting 30 to 90 days for payment.