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 steady 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 invoice factoring partner.
Oil and Gas Cash Flow Problems
One of the most obvious issues is that the payment terms for oil and gas companies 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 business days for payment!
So why does it take so long just to submit an invoice? That’s another oil and gas sector quirk. Oftentimes the process looks something like this:
1. The business owner will do their work in the field and get it acknowledged by a project manager.
2. Then they go home and put an invoice together and send it to their customer’s accounts payable department.
3. The accounts payable department issues a purchase order for the work.
4. The business owner has to submit the invoice again.
Not all accounts receivable financing 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 access to consistent cash flow for oil and gas companies is that oftentimes their businesses are capital intensive. They need to purchase equipment (often specialized), hire staff, contractors, leases, and supplies on a revolving basis, so a lot of cash is going out of the business every single day. The costs of equipment alone can be astronomical. These are just some of the critical expenses those working in the oilfield industry must cover on a day-to-day basis.
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. Unfortunately, even applying for and waiting on the approval process for traditional financing like a bank loan can take just as long as waiting on extended payment terms.
Improving Oil and Gas Cash Flow
The natural next step for these business owners is to find a way to deal with slow-paying customers and get paid faster. If you’re also dealing with this problem, here are a few tactics our clients have tried with varying success:
- Negotiating a payment plan or payment terms directly with their customer. The squeaky wheel gets the grease (or oil!) However, sometimes the customer is having their own cash flow challenges, which is why they want the long payment terms.
- Offering early payment discounts. Another tactic for getting outstanding invoices paid faster. If cash flow issues aren’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 unpaid 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 from customers 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 the industry turn to oil and gas factoring companies; it levels the playing field for many small businesses.
What to Look For In OIl and Gas Factoring Companies
Once you’ve decided you want to try invoice factoring (also known as invoice funding), it’s important to find the right invoice factoring partner. Many business owners have been left with a bad impression of receivable factoring after choosing an oil and gas factoring company that acted slowly, charged hidden factoring fees, or insisted on a long-term contract. To get the best experience, ask any invoice factoring companies you’re considering about these points (in addition to ensuring they offer competitive rates).
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 receivable 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 oil and gas factoring companies 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 services 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 oil and gas 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 receivable 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. Flexible contracts are a must.
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 unpaid 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 agreement allows you to choose what to fund and when to fund so you can manage your constant cash flow demands in a way that makes sense and saves money.
It’s also important to make sure there’s no cash cap. The invoice amounts for oil and gas clients 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 a cash advance to fulfill a larger contract. The right oil and gas factoring companies will be able to grow the partnership in step with your continuous business growth – not shut you down when you need additional capital the 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 strategic 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 into our factoring platform. This cuts down on manual work for you and gets cash in your bank account faster.
4. Excellent customer 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 oil and gas 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 business 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 challenges and chasing accounts receivable and focus on running your business and going after growth opportunities.
As the largest AI-powered invoice financing platform in North America, FundThrough has extensive experience working with oilfield companies to simplify their payment processes and turn outstanding receivables into cash with flexible terms to meet your unique needs.