In the oil and gas industry, maintaining a steady cash flow is critical to funding operations, managing payroll, and covering significant operational costs. However, long payment cycles—often 30, 60, or even 90 days—can strain businesses, especially when waiting on large payments from suppliers, contractors, or partners. Accounts receivable (AR) financing, also known as invoice financing, offers a practical solution to bridge this gap.
This blog explores how invoice financing works, its benefits for oil and gas companies, and strategies for choosing the right financing provider.
What Is Accounts Receivable or Invoice Financing?
Accounts receivable or invoice financing is a funding method that allows businesses to access cash by selling their unpaid invoices to a financing company. Instead of waiting for clients to pay their invoices, companies receive an advance—usually 80% to 90% of the invoice value—from the financing provider. Once the client pays the invoice, the remaining amount (minus fees) is released to the business.
Types of Invoice Financing
- Invoice Factoring: The financing company buys your invoices outright and takes responsibility for collecting payments from clients.
- Invoice Discounting: You retain control of invoice collections, but the financing company advances a percentage of the invoice value.
Why Oil and Gas Companies Need Invoice Financing
The oil and gas sector is characterized by capital-intensive projects, complex supply chains, and extended payment cycles. Here are some of the main reasons oil and gas companies turn to AR financing:
1. Lengthy Payment Terms
Oil and gas companies often deal with large corporations and government entities, which can take 60 to 90 days—or longer—to settle invoices. This delay can create a cash flow crunch.
2. High Operating Costs
From drilling equipment to labor expenses, the industry requires substantial upfront investment. Invoice financing provides working capital to meet these costs.
3. Seasonal and Market Volatility
Oil prices are notoriously volatile, and seasonal demand can impact revenue. Financing ensures companies can weather market fluctuations without disrupting operations.
4. Growth Opportunities
When cash is tied up in receivables, businesses may struggle to capitalize on new projects or contracts. Invoice financing frees up funds to invest in growth.
How Does Invoice Financing Work for Oil and Gas Companies?
- Submit Invoices: Provide your unpaid invoices to the financing company.
- Receive Advance: The financing company advances a percentage of the invoice value, typically 80% to 90%.
- Client Payment: Your client pays the invoice directly to the financing company (factoring) or to you (discounting).
- Final Payment: The financing company releases the remaining funds, minus fees.
Key Benefits of Accounts Receivable Financing in Oil and Gas
1. Improved Cash Flow
Invoice financing ensures your business has access to cash when you need it, enabling you to cover operational costs without delays.
2. No Need for Collateral
Unlike traditional loans, invoice financing is secured by your unpaid invoices, not physical assets.
3. Flexible Funding
The amount of financing grows with your business. The more invoices you generate, the more funding you can access.
4. Faster Approval Process
Traditional bank loans can take weeks or months to process. AR financing typically offers faster approvals, sometimes within 24 to 48 hours.
5. Mitigation of Payment Risks
In factoring arrangements, the financing company may take on the risk of non-payment, depending on the agreement.
Challenges of Invoice Financing in Oil and Gas
While AR financing offers many benefits, it’s essential to understand the potential drawbacks:
1. Cost of Financing
Fees can range from 1% to 5% per invoice per month. For high-margin businesses, this may not be a significant issue, but for low-margin companies, it can impact profitability.
2. Client Relationships
With invoice factoring, clients deal directly with the financing company, which could affect relationships if not managed carefully.
3. Eligibility Requirements
Not all invoices qualify for financing. For example, invoices from unreliable or high-risk clients may not be accepted.
4. Short-Term Solution
Invoice financing addresses immediate cash flow needs but doesn’t solve underlying financial management issues.
How to Choose the Right Financing Partner
Finding the right invoice financing provider is critical to maximizing the benefits while minimizing risks. Here’s what to consider:
1. Industry Experience
Choose a financing company that understands the oil and gas sector’s unique challenges.
2. Funding Speed
Look for providers that can process applications and advance funds quickly.
3. Flexibility in Terms
Check for flexible financing structures that align with your business needs.
4. Transparent Fee Structure
Avoid providers with hidden fees or unclear terms. Request a detailed breakdown of costs upfront.
5. Customer Service
Partner with a provider that values clear communication and maintains strong client relationships.
Case Study: How Invoice Financing Transformed an Oilfield Services Company
A mid-sized oilfield services company was struggling to meet payroll due to extended payment terms with a major client. With over $500,000 tied up in unpaid invoices, the company turned to invoice factoring.
The Results:
- Faster Payments: Received 85% of the invoice value within 48 hours.
- Operational Continuity: Maintained payroll and funded ongoing projects.
- Scalable Growth: Used the additional cash flow to take on a new contract worth $1 million.
This success story demonstrates how invoice financing can be a game-changer for businesses in the oil and gas industry.
Best Practices for Oil and Gas Companies Using Invoice Financing
- Vet Your Clients: Work with reliable clients to reduce payment risks.
- Use Financing Strategically: Reserve invoice financing for large invoices or critical cash flow gaps.
- Track Fees: Monitor financing costs to ensure they don’t erode profits.
- Communicate Clearly: Maintain open communication with clients about payment terms and expectations.
Invoice Financing vs. Other Funding Options
Traditional Bank Loans
- Pros: Lower interest rates, long-term funding.
- Cons: Lengthy approval process, strict credit requirements.
Lines of Credit
- Pros: Flexible access to funds.
- Cons: Requires good credit and may involve collateral.
Equity Financing
- Pros: No repayment required.
- Cons: Dilutes ownership and control.
Invoice financing offers a middle ground by providing fast, flexible funding without sacrificing equity or relying on extensive credit histories.
Conclusion: The Role of Invoice Financing in Oil and Gas
For oil and gas companies, maintaining a healthy cash flow is essential for success. Accounts receivable financing offers a flexible and efficient way to unlock the value of your unpaid invoices, ensuring you have the working capital needed to thrive in a competitive and capital-intensive industry.
By partnering with the right provider, you can turn delayed payments into immediate cash, enabling your business to seize opportunities, overcome challenges, and sustain growth.
If you’re ready to explore how invoice financing can benefit your oil and gas company, contact Asset Commercial Credit today. We specialize in tailored financing solutions to keep your business moving forward.
