The oil business in the United States is seemingly in turbulent times. On one end of the spectrum are new technological and innovative breakthroughs causing significant increases in output and demand, resulting in higher margins. However, increasing competition among suppliers leads to low prices, which often leads to a liquidity constraint, forcing businesses to turn to cash flow finance options.
In the oil business, extended payment terms are prevalent, making it difficult for the business to maintain a consistent cash flow. Rather than worrying about the liquidity restrictions, proceeding with factoring for the oil business is a smart move.
What is oil business factoring?
There are multiple options of factoring for the oil business that financial institutions offer. Out of all, invoice factoring is the most sought-after option for availing of factoring services. Selling the invoice receivables to a factoring company in exchange for cash upfront is the practice of factoring. Typically, the factor advances 80-90 percent of the total invoice value.
Once the customer pays the due invoice, the factor will deliver the remaining funds to the company, minus a nominal factoring fee. The fee typically ranges from 1 to 5 percent.
Why is factoring effective for oil businesses?
Late payments can cause business problems, especially when they require funds to pay for industry basics like equipment, staff, and start-up ventures. It’s also critical to funding exploration expeditions and research and development programs. For such a corporation, the solution to a cash flow crisis is as simple as acquiring a loan.
For enterprises that serve the oil industry, applying for traditional financing through a bank is not always viable. Lending institutions take a long while, up to a couple of months, before releasing the funds. As a result, invoice factoring is a much more feasible option for such organizations. Invoice factoring allows a company to get cash right away. turns to be a terrific alternative funding solution for everyone from a small vendor to oil equipment to a prominent oilfield owner.
Some of the other added benefits of factoring are as follows.
Obtaining authorization for finance from a bank or other traditional lenders can take weeks or even months of apparently endless paperwork. Usually, time is a commodity that the developing business does not have.
Most factoring providers can set up an account and begin funding receivables in as little as 24 hours. Some factoring providers can advance up to 90% of the invoice’s value, then pay the remaining balance owing after the consumer pays, minus any factoring fees.
One of the essential advantages of invoice factoring is that it is not a loan. When a company chooses to factor in its account’s receivables, it does not have to inherit any debt. The factoring company buys their invoices and gives the oil company cash they have already earned and is waiting to be paid.
Most forms of traditional borrowing are less flexible than invoice factoring. Only the quantity of eligible invoices a corporation has to factor limits the amount accessible. The financial source is virtually inexhaustible. Invoice factoring is an optimum solution for the company’s long-term economic health because the line of credit rises as the receivables grow.
How to proceed with factoring?
The factoring can be received in seven easy-to-follow steps.
- The first step is to generate invoices that are due in 30 to 90 days.
- Next, create an account with a factoring company.
- As per the requirement, submit the relevant documents along with invoices to qualify for the fund approval.
- Based on an agreed-upon percentage, the factor gives a quick cash advance.
- The invoice is paid by the debtor.
- The funds are transferred to a temporary reserve account.
- After deducting the costs and the amount paid in advance, the factor transmits the remaining funds to the initiator’s bank account.
For oil enterprises, invoice factoring is a unique financial option. It brings much financial aid unaccompanied by the debt risk or additional loan interest. Factoring is a cost-effective alternative to the traditional lending route. Working with a factor that specializes in the oil business has the added benefit of knowledge of the industry trends and patterns, further simplifying the process.