How the oil & gas industry can use A/R financing to better manage cash flow

By Dan Effa

money and bank

Photo credit: http://www.flickr.com/photos/68751915@N05/6870876951/

Business owners often feel like banks don’t have any money to loan right now, and tight loan restrictions are a reality for most businesses today. With bank loans no longer a feasible option for many companies, business owners need to seek out alternatives to secure the capital needed to meet payroll, cover seasonal adjustments, and seize market opportunities.

An increasing number of companies, particularly in the oil and gas industry, are using financial services, called factoring, to secure the quick capital that is crucial to the operation of their business. As an alternative to traditional bank lending, factoring provides businesses with capital when needed on a flexible formula basis that is proportional to sales. The factoring “line” grows as the sales to credit-worthy customers increase, giving clients an opportunity to capitalize on market opportunities.

In the oil and gas industry, it’s not uncommon for a business owner to be in a situation where they’re depending on a cheque from a major job to arrive in order to cover payroll or other expenses.

Even the healthiest, most prosperous businesses sometimes end up in such situations, needing financing to help smooth out the cash flow bumps. The owner of a well-established B.C. trucking company in the oil and gas industry recently had a number of critical cash flow challenges arise that threatened the owner’s ability to make payroll on time. Not only had the company recently undergone a change in its partnership structure, but accounting problems related to a former employee coupled with late government remittances had created a critical financial situation.

Making matters worse, the company’s financial standing was dependent on one high-paying customer, putting their cash flow at the mercy of when the customer decided to pay their bill—which could range anywhere from 30 to 90 days. With payroll to meet, this business owner needed fast access to the capital that was critical to running her business.  Liquid Capital was able to provide the working capital this client needed to
pay her bills and payroll on time during the payment waiting period. Their partnership lets the owner rest easy that she’ll be able to pay her bills and her employees on time regardless of whether her customer’s payment is delayed.

Factoring services have become increasingly important to the gas and oil service industry – 25 per cent of all of Liquid Capital’s clientele are in this field. Factoring represents a $2.3 trillion industry worldwide, and volume has increased 62 per cent over the past five years worldwide, and by nearly 21 per cent from 2010 to 2011 for Liquid Capital in Canada.

Factoring is a cost-effective, flexible, and responsive form of trade financing that allows clients to grow and prosper in both good and bad economies. At some firms such as Liquid Capital, there are no minimum revenues or long-term contracts required, so the business owner is in charge of the total cost. In addition, getting money from a factoring company doesn’t make a company beholden to any banking covenants or the stringent requirements of equity partners. Factoring companies not only provide working capital but a full outsourced credit and accounts receivable management solution. Companies often choose to continue to use them for credit and collection services alone even after the need for additional cash has passed, with many businesses finding it more efficient than creating their own departments to handle these services.

Each company’s cost of factoring is based on their risk, industry, and market position. While critics say it’s more costly than lending, those in factoring beg to differ. Factoring companies make it possible for businesses to continue operating and growing without cash flow problems slowing them down. Additionally, factoring can be cheaper than a bank loan that’s not in good standing, and the benefits of getting cash to enable
company growth is priceless.

danDan Effa is the owner of Liquid Capital Pacific Corp. in Surrey, B.C. Liquid Capital is an international network with more than 60 offices across North America.

For more information on Liquid Capital, visit financingsuccess.ca. Dan Effa can be reached at (877) 326-3332, L. 111 or by email at deffa@liquidcapitalcorp.com.

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