No doubt the oil and gas business is one like no other, with a vital role in keeping our global economy moving (literally and figuratively!) One lesser known characteristic that sets the industry apart are its issues with cash flow and payment terms. In this post, we’ll explore what those are, solutions to try, and what to look for in oil and gas factoring companies as you shop for the right partner.
Oil and Gas Cash Flow Problems
One of the most obvious issues is that the payment terms for oil and gas tend to be long. We’ve had clients who had to extend 90 day payment terms, and then go through a process to submit an invoice that took 30 days. That 90 day countdown didn’t begin until the invoice was submitted, so they were looking at 120 days to get paid!
So why does it take so long just to submit an invoice? That’s another oil and gas industry quirk. Oftentimes the process looks something like this:
- The business owner will do their work in the field and get it acknowledged by a project manager.
- Then they go home and put an invoice together and send it to their customer’s accounts payable department.
- The accounts payable department issues a purchase order for the work.
- The business owner has to submit the invoice again.
Not all accounts payable processes are like this, but it’s common. These steps also don’t include preparing all the documentation that has to be submitted with the invoice. We’ve seen some invoices that were over 15 pages long because of all the supporting documentation. Add in the fact that this process is still paper-based at many companies and it’s easy to see why it takes so long just to get an invoice approved, let alone paid. Obviously, this situation alone creates cash flow problems.
The other problem that impacts cash flow for oil and gas companies is that oftentimes their businesses are capital intensive. They need specialized equipment, staff, contractors, leases, and supplies on a revolving basis, so a lot of cash is going out of the business every single day.
In short, these conditions mean that many companies in this industry have large amounts of cash going out constantly, but have to wait a while for cash to come in. It creates the perfect storm for ongoing cash flow problems. It’s an incredibly stressful situation if you don’t have a way to have cash coming in fast enough.
Improving Oil and Gas Cash Flow
The natural next step for these business owners is to find a way to get paid faster. If you’re also dealing with this problem, here are a few tactics our clients have tried with varying success:
- Negotiating payment terms directly with their customer. The squeaky wheel gets the grease (or oil!) However, sometimes the customer is having their own cash flow problems, which is why they want the long payment terms.
- Offering early payment discounts. Another tactic for getting invoices paid faster. If cash flow isn’t a problem for your customer, this could certainly help get the payment process moving. (But be sure to keep an eye on how much you’re giving up. For example, a 5 percent discount on your invoice on net 30 term is basically 60 percent APR!)
- Asking to submit the invoice before work is done. In reference to the invoice payment process above, business owners effectively have to submit their invoices twice. If your customer is open to it, you can ask to submit the invoice ahead of time so you can get the purchase order sooner and then submit your invoice for payment when the work is complete.
If you have a good client relationship, it doesn’t hurt to try these tactics. However, they take more time out of your busy day, they have to be repeated with each customer whose payments you regularly wait on, and – most importantly – they might not work. The other side to this is that many large companies are set in their ways and have the power to dictate the terms with a “take it or leave it” attitude that implies they could always hire someone else. It can feel like you’re at the mercy of big buyers. That’s why so many business owners in oil and gas turn to invoice factoring; it levels the playing field for many small companies.
What to Look For In OIl and Gas Factoring Companies
Once you’ve decided you want to try invoice factoring, it’s important to find the right partner. Many business owners have been left with a bad impression of factoring after choosing a company that acted slowly, charged hidden fees, or insisted on a contract. To get the best experience, ask any invoice factoring companies you’re considering about these points.
1. Familiarity with industry and buyers
Not only are the payment processes for oil and gas industry-specific, the processes for individual customers are all different. A factoring company who is unfamiliar with the industry will need to be educated about this, and the same is true if any of your customers have special ways they pay invoices.
Many factoring companies who work with oil and gas clients also have relationships with many buyers in the space. This eliminates the need to make an introduction to your customer. It will save you time (and a headache) if you find a company already up to speed.
2. Flexibility with your situation
A usual step in invoice factoring is making sure the invoice is real and representative of the actual work that was completed. Another quirk with oil and gas invoicing is that your customer might not always give explicit approval of an invoice, and if that’s the case, many factoring companies won’t move forward.
Flexible factoring companies will have other ways of verifying the invoice. For example, if you use OpenInvoice, FundThrough can see when the status of an invoice has changed. Another option is to look at the contract and verify that you’ve sent in everything needed to get paid, including all the backing documentation. For some factoring companies, knowing that you’ve fulfilled your end of the deal to your customer in accordance with a contract is proof enough that the invoice will get paid, so they will go ahead and get you funded.
Here’s a mantra to keep in mind when evaluating a factoring company’s level of flexibility: no minimums, no maximums, no long term commitments. In short, make sure the factoring companies you’re considering don’t require you to fund a minimum (or all) of your invoices, don’t have a funding limit, or force you into a contract.
For example, if your business’ work is seasonal, you might not always have invoices you want to factor; if you’re contractually obligated to fund all your invoices, there are times when you don’t need to factor and are spending money on interest for no benefit. It’s important that a factoring company allows you to choose what to fund and when to fund so you can manage your cash flow in a way that makes sense and saves money.
It’s also important to make sure there’s no cash cap. The invoice amounts in oil and gas can be seven figures in some cases. (That was certainly the case with our client Global Pipeline who wanted to bid on a $20 million dollar project.) With that kind of money it’s easy to hit a funding limit at a time when you need cash to fulfill a large order. The right factoring company will be able to grow the partnership with you as you grow – not shut you down when you need them most.
3. Data Integrations with accounting platforms
Billing your customer is already a manual set of tasks, so getting an invoice factored shouldn’t add more pain to the process. A factoring company that takes advantage of technology streamlines the steps to getting you funded. For example, by being integrated with OpenInvoice and Workbench, you can click a button to start the factoring process, and FundThrough can easily pull necessary data. This cuts down on manual work for you and gets cash in your bank account faster.
4. Excellent service to you and your customers
If you’ve worked hard to land a customer, you don’t want to risk tarnishing the relationship. A factoring company who understands how important that is will make it as easy as possible for your customer to redirect their payment. But they will also build and maintain a positive relationship. Some factoring companies aggressively hound buyers for payment, so it’s important to ask how they work with your customers. A quality company will also give you a specific customer service contact to work with, provide prompt, transparent communication, and talk to you first if they need to contact your customer.
There are many factoring companies out there, but not all of them are experts in this field. By discussing these points with the ones you’re considering, you’ll find the right fit. That way, you can stop worrying about improving cash flow and chasing accounts receivable and focus on running your business.
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*Promotion applies to newly approved FundThrough fundings on accounts in good standing, on eligible invoices only. To qualify for this offer you must be an Enverus supplier with a FundThrough-enabled account. Promotion is valid until July 31, 2021. Funding fees will be charged on the funding initially and rebated once all funded invoices during the promotional period have been paid to FundThrough. For further information on this promotion please contact FundThrough directly at +1-855-669-9914.