The oil and gas industry is a capital-intensive business. People operating in this field need a large, continuous flow of cash to stay competitive. Most oil and gas companies sell their products on terms, not cash basis. Such arrangements help boost sales and foster long-term business relationships with the customers. The problem is it leaves them with account receivables they can’t utilize until the customers pay.
Gas factoring provides alternative financing as a solution in such cases.
It enables the gas and oil companies to sell their pending invoices to the right factoring company and turn it into cash. When a company decides to sell its invoices, the customer will receive a notification about the new factor to direct his payment.
Many oil and gas industry players can enjoy this type of invoice factoring. These include gas transporters like pipeline operators and truckers, extraction, refineries, construction, etc.
Factoring is for companies with the following needs;
- Cash flow issues arising from slow-converting account receivables
- Small Oil and gas companies unable to access bank loans for one or more reasons.
- New companies that still need to build creditworthiness with banks
- Existing companies with inadequate collateral.
Cash flow problems are the number one reason why small businesses do not scale. But with the easy access to cash from factoring, they can expand by handling the necessary expenses. It provides money for their many working capital needs such as;
- Completing paycheck cycles
- Purchasing new equipment
- Offsetting recurring bills
- Payment of legal documents, licenses, and regulatory permits
- Increase the stock and offer better terms for customers.
- In the spirit of expansion, it can also help to hire more employees.
The most important benefit of factoring is improved cash flow for the business. Even with the delay in payment by customers, there won’t be financial constraints in the company.
As long the company has account receivables, there is no limit to how much cash advance they can receive.
It is a quick way to liquidate account receivables- For small oil and gas companies, liquidity problems come from slow-paying clients. When they use invoice factoring, they can access the cash much faster as the process takes approximately 48 hours to a week.
Easy access because of fewer qualification requirements. It plays a vital role in boosting new entrants into the oil and gas business. Bank oil and gas loans require creditworthiness from the company, but factoring needs proof of customers’ creditworthiness. New businesses only need reliable customers to access funds through invoice factoring.
It is not a loan that accrues interest over time. Technically it is cheaper to operate on gas factoring than loans.
Boosts the company growth
Consistent cash flow from invoice factoring helps businesses to grow. They can increase the stock, expand by buying more equipment, and adding staff.
It is flexible funding- Factoring offers various flexible contracts depending on the business needs at the time. A company can sell selected, all or a single invoice. Factors also provide both one-time and long-term agreements.
After deciding this is the right financing option, what next? These are the crucial pointers for identifying a factoring company.
The type of services they offer
The type of service is first and foremost key. It tells of whether the company offers spot or whole ledger factoring. And also, if these are on a recourse or non-recourse basis. That’s because non-recourse factoring attracts higher rates due to the risks involved.
The factoring business is highly specialized, so look for companies that work with the oil and gas field.
Terms of Agreement
Another pointer is the terms of engagement. Knowing what they charge in terms of advance rates and fees can help choose the best factor.
How Long the Process Takes
Invoice factoring is a quick way to access funds but, the setting up process can prolong it. Some companies take weeks, others a matter of days. Find out how long a company takes to get the ball rolling. Online companies have automated procedures that help speed up verification.
Running a petroleum-related business is expensive. It requires maintaining a high volume of working capital. Oil and gas factoring companies provide the most convenient short-term solution.