Accounts Receivable Factoring for Small Businesses in the Oil and Gas Industry
With recent horizontal drilling developments, contractors, manufacturers, service providers and distributors who work for the large oil and natural gas corporations have the opportunity for unparalleled growth over the next 10 years.
However, new contracts come with price tags and many times it’s the contractor whose costs must be reimbursed.
Take a frac-site water transporter or well site service provider that has upfront fuel or welding costs. By the time you’re 30 days into the contract, your cash flow is in a major crunch. Forget growth, right now, you’re just trying to make payroll.
And, with some 60,000 small oil and gas businesses ranging in $1M-$25M in annual sales nationwide, there’s a definite competition in the shale plays. You need a financing plan that’s going to help you complete and take on new projects, at the same time, without capital constrain.
How can a small oil and gas company secure the financing it needs for growth?
Small businesses in the oil and gas industry are no strangers to capital constrain, when the industry is predominantly led by a handful of corporate gas conglomerates which control the payables process.
Accounts receivable factoring is a solution.
For example: The same frac-site water transport company referenced above is working for one of the major natural gas companies in the Marcellus shale in Pennsylvania, hauling water to and from the work site. The company is averaging 30 trucks of water per day, which can be invoiced to the customer for $70,000 at the end of the month. However, fuel is costing the company $10,000 per week. Before the first invoice is sent, the company is running $40,000 in negative cash flow.
Then, the customer has 30 days to pay the invoice. That’s now $80,000 in negative cash flow before the $70,000 is collected. The hauler is continuously working to fulfill a 60-day deficit (that is, if the customer pays on time.)
Instead, the water hauler finances the $70,000 invoice with an accounts receivable factoring company, commonly referred to as a “factor.”
When ready to invoice, the hauler submits the invoice to the factor instead of to the customer. The factor funds up to 95% of the invoice on Day 1, creating $66,500 in positive cash flow, which can be used to fund the fuel costs and contribute to other working capital needs.
Why is cash flow so important for growth?
Cash is king. It is the common denominator that connects all businesses. But, other than knowing their current cash balance by looking at their bank account, most small businesses don't manage their cash.
Accounts receivable factoring is a great way to help you understand what a cash flow operating cycle means, how to calculate it, and what influences it before you can improve it. Managing cash flow will provide a real sense of control over the business and accounts receivable factoring is a great first step.
In addition, by having a strong cash flow management program, small businesses in the oil and gas industry can position themselves as stronger contenders to be awarded new contracts.
For more information on how to improve your oil and gas business’ cash flow and to learn more about accounts receivable factoring for the oil and gas industry, please contact us today for a free consultation.