Last Updated on February 21, 2023
Intense competition in the American oil and gas industry leads to low prices, meaning you don’t have a large profit margin. It’s made worse by customers taking weeks or even months to pay, resulting in cash crunches that create a frustrating cycle of negative cash flow and increasing debt.
To keep growing your oil company and stay competitive, you need cash to make payments and build good relationships with business partners. Fortunately, factoring for the oil and gas industry can help your company regain a healthy cash flow, even when customers delay payment.
In this article, we discuss how factoring for oilfield contractors works, its benefits, and how it stacks up against other financing options. Read on to learn how altLINE improves cash flow and grows your business through invoice factoring for the oil and gas industry!
What Is Oilfield Factoring?
Oilfield factoring is when your business sells invoices to a third-party company in exchange for a cash advance. Oilfield factoring is generally used to improve cash flow when customers take a long time to pay or because uncertain and staggered payments can result in negative cash flow that may hurt your business.
Benefits Of Invoice Factoring For the Oil and Gas Industry
Whether you’re in the business of drilling, tank cleaning, flowback testing, or another sector of the oil and gas industry, factoring can provide you with extra funds to improve cash flow when dealing with staggered invoice schedules and delayed customer payments. Here are some benefits you can get with invoice factoring for oilfield services:
Get Your Accounts Receivable Invoices Paid In Days, Not Months
Many customers can take weeks or even months to pay, putting a strain on your cash flow. The best oilfield factoring companies approve your application within 1 or 2 days. This means you can earn up to 90% of your invoice’s face value within 24 to 48 hours instead of 30, 60, or even 90 days.
Access Capital To Grow While Maintaining Equity
At times, you must pass on growth opportunities because you need to sacrifice equity to pursue them. However, invoice factoring sets you up for long-term success by providing quick cash that’s necessary to grow your team, pay debts, and take on new projects without selling valuable business equity.
Take The Guesswork Out Of Payments
Overdue customer payments can hurt your company’s finances. Oilfield factoring improves your cash flow to offset late customer payments and ensure your company stays financially healthy.
Additionally, it can be frustrating to wait for customer payments due to long payment cycles. With net 30 and net 60 payment terms, your customers control your cash flow, leaving you to wonder when you’ll receive your next payment. With invoice factoring, you don’t have to rely on customer payments to finance your business, putting the control back in your hands.
How Does Oilfield Factoring Work?
Invoice financing for oil and gas companies through altLINE works by granting you a cash advance to pay operating expenses and fuel business growth. Instead of waiting on customers to pay invoices, you can use invoice factoring to get cash when you need it most. Cash advances also soften the blow of late customer payments on your finances.
Here is a quick guide to invoice factoring for oilfield contractors and gas companies with altLINE:
Submit Your Unpaid Invoices
altLINE accepts all kinds of customer invoices in the oil and gas industry. However, we generally favor invoices from large or medium-sized companies with good credit. Additionally, we do not factor invoices for customers who are consistently late on their payments.
If your invoice turnover time is between 30 and 90 days, your receivables are well-positioned for factoring.
altLINE Advances 80-90% Of The Invoice Face Value
You can generally expect a factoring advance rate of 80-90% of your invoice’s face value, deposited into your bank account within 24 to 48 hours after submission to altLINE. The exact timing of your cash advance depends on the customer’s receipts and acknowledgment of goods.
altLINE Helps Collect Payment Of Your Outstanding Invoices
altLINE helps you monitor and collect customer payments. We deposit customer payments in a secure lockbox and report collection progress to you via an online customer portal.
If issues arise, we will work with you to communicate with customers to resolve disputes professionally so you can maintain good business relationships.
altLINE Pays Out The Remaining Unpaid Invoice
After deducting our factoring fees (typically 1-5% of your invoice face value), we will transfer the remaining invoice value to your business account.
Uses For Your Cash Advance
Receiving cash advances from altLINE’s oilfield factoring service means you can fund your business without waiting on customer payments. Instead, you can unlock growth capital sooner and dodge long payment cycles to accelerate business development. Here are some things you can do with the cash advance:
Paying your oilfield workers should always be a priority, but slow customer payments can make it difficult to make payroll on time. Getting a cash advance from factoring helps prevent late payroll, keeping morale high and your company financially sound.
Accept New Business
You shouldn’t have to turn down new projects and stop growing your business because of late customer payments and slow payment cycles. Invoice factoring for oil companies can provide the cash you need to take on new business and expand into new territories without sacrificing equity.
Pay Operating Expenses
Equipment maintenance, waste disposal, and well leases are just some of the expenses you need to pay as an oilfield operator. Gas and oil invoice financing gives you extra funds to pay all these costs when they arise without disrupting your cash flow or taking on debt.
Grow Your Team
As you take on new projects, you may find yourself needing to hire additional workers. Getting a cash advance from invoice factoring can help you do so in a timely manner so that you don’t have to wait for your next invoice to be paid to grow your team.
Oil And Gas Businesses We Fund And Finance
Our factoring services help a variety of sectors and businesses. Here are a few that can benefit from oil and gas financing:
- Oil and gas exploration companies
- Oil drilling companies
- Oil and gas transport companies
- Oil and gas pipeline manufacturers
- Oil refineries
- Fueling stations
- Tank cleaners
- Flowback and well testing providers
Invoice Factoring For Oil And Gas vs Other Funding Options
In addition to invoice financing for oilfield contractors, you have a few other options to enhance business cash flow. In this section, we compare alternative oil and gas business financing options against invoice factoring.
Oil And Gas Factoring vs Bank Line Of Credit
Most companies seek a bank line of credit to improve cash flow before considering other alternatives. While many oil and gas companies can qualify for a line of credit, the funds may not be enough to grow their businesses.
Banks typically look to your fixed assets to determine whether you qualify for a line of credit. As an oil and gas company, you likely have a lot of fixed assets to make approval easier. However, if you are a new company, you may find qualifying for a line of credit harder.
Invoice factoring is the better option if you are a new company with only a few fixed assets because factoring companies look at your customers, instead of your assets, to determine your funding eligibility. If you work with an established and creditworthy customer base, factoring companies are likely to give you the working capital that banks cannot.
Oil And Gas Factoring vs ACH/MCA Loans
ACH (automated clearing house) or MCA (merchant cash advance) loans are popular because their lenders determine qualification just by reviewing your bank statements. Moreover, ACH or MCA loans only take one or two business days to pay out, which makes them a great option if you need fast cash.
However, the main drawback of ACH and MCA loans is their high fees, which can reach up to 60% of your initial loan. ACH and MCA lenders also like to suggest loan renewals that may land you in even deeper financial trouble.
Oilfield factoring gives you more peace of mind than ACH and MCA loans because rather than taking out a loan with high fees, you receive a cash advance based on your customers’ likelihood to pay their invoices. Instead of scrambling to repay mounting debts, you can receive a cash advance based on your customers’ creditworthiness with invoice factoring.
Oil And Gas Factoring vs Quick Pay Discounts
Offering discounts for quick repayment can accelerate cash flow when you need it. However, quick pay discounts do not always work because some customers will choose to have more cash on hand instead of accepting your early payment offer, leaving you low on cash and unable to grow your business.
Because quick pay discounts are relatively unreliable, you cannot depend on them to sustainably improve your working capital. Instead, quick pay discounts are best used for an occasional cash boost.
Typical Oilfield Contractor Factoring Rates And Fees
Factoring companies determine your fees based on how much you plan to factor and how long customers take to pay. Factoring more amounts and getting customers to pay faster usually lead to lower rates. Factoring companies also consider criteria like how many years you have been in business, customer base diversity, and customer credit quality.
Oil and gas factoring companies charge two types of fees:
- Initial fee: This fee covers the factoring process and a certain number of days that an invoice can be outstanding (typically the first 30 days). Initial fees usually cost between 0.90% and 3.50% of your invoice’s face value.
- Incremental fees: These periodic fees kick in after the factored invoice has remained outstanding beyond the time covered by the initial fee. Incremental fees typically cost between 0.25% and 1.50% of the invoice’s face value and increase the longer an invoice is outstanding.
Related: Invoice Factoring Rates
Requirements To Apply For Oilfield Factoring
Before getting a cash advance from oilfield factoring, you must provide information to qualify. Here are the documents you need to apply for invoice factoring with altLINE:
List Of Existing And Potential Customers
altLINE needs a list of your existing and potential customers to review their credit quality and determine factoring eligibility.
altLINE provides a form you must fill out. You also need to enclose the following documents alongside your application:
- Business ownership identification
- Personal identification
- Employer Identification Number
- Customer contract copies
- Articles of incorporation and other relevant corporate paperwork
Accounts Receivable Aging Schedule
Many businesses record all their outstanding invoices in an accounts receivable aging schedule. altLINE uses this report to research customer payment behaviors and determine their factoring eligibility. We will consider invoices that are 30 to 90 days outstanding, but invoices that customers have declared they can’t pay may be ineligible for factoring.
New client approval with altLINE typically takes anywhere from 3 days to 2 weeks. If you are interested in learning more about how altLINE can fund your business, factoring rates, or timelines, fill out a quote and one of our representatives will give you a call.
Frequently Asked Questions About Factoring For the Oil and Gas Industry
Do you still have some questions about oilfield factoring? Here, we answer some common questions on the topic:
Do you need to run a credit check before getting started?
altLINE runs a credit and background check on all oilfield company owners. However, there are no minimum credit thresholds for approval. Background checks are reviewed for financial-related crimes or felonies.
In the event a borrower has a spotty background, approval with altLINE may be in question. If the borrower is disqualified, altLINE will often work with the borrower to identify an oilfield factor that is willing to help.
Do you require UCC filings when factoring oilfield invoices?
Upon executing a term sheet, altLINE will file a UCC on the client’s business. This UCC filing allows altLINE to properly secure the collateral (i.e. the invoices) it plans to advance against when the factoring facility is in place. UCC filings are an integral part of any form of lending.
Is oilfield factoring a debt or loan?
Oilfield factoring is neither debt nor a loan. Invoice factoring is the sale of your invoices to a third party. The money advanced against these invoices will be repaid by your customers. However, altLINE is a recourse factor, so you may need to pay the cash advance back if your customer fails to pay their invoice.
Do you offer non-recourse oilfield factoring?
altLINE only offers recourse factoring for the oil and gas industry. While you must repay the cash advance if your customer fails to pay their invoice, recourse factoring structures often allow for factors to extend lower rates and larger advances to clients. See our page on recourse vs. non-recourse factoring for more information.
Jim is the General Manager of altLINE by The Southern Bank. altLINE partners with lenders nationwide to provide invoice factoring and accounts receivable financing to their small and medium-sized business customers. altLINE is a direct bank lender and a division of The Southern Bank Company, a community bank originally founded in 1936.