Doing business in the oil field is reminiscent of gold rush days, with lots of risk, challenge and opportunity for a small business or contractor willing to work hard. It is an entrepreneurial and exciting place to be, and often it does not take long for both technical and hands-on workers to realize that they can make it big—as long as they can find a way to manage cash flow and navigate the more complex aspects of doing business with big oil companies. Accounts receivable (A/R) financing, also known as factoring, is playing an important role here, enabling oil producers to effectively manage cash flow in a volatile, demanding industry. It’s a less traditional type of financing, potentially not as well understood in the rough and tumble environment of the oil field. However, it is optimized to support businesses based on invoices and contract assets. Factoring provides an alternative to options like bank loans or credit cards, which require time, financial review, and ongoing payments and management in an industry where most operators have minimum desk time for these types of administrative tasks.

Thriving takes planning

Independent contractors, producers and operators are enjoying the most substantial boom in American oil production in decades, yet all should assume complexity and long terms in getting paid for their oilfield work. While the payoffs are big, there are many costly steps between doing the work and actually getting paid, things like establishing insurance or covering housing, food, fuel, payroll or equipment. Sign-offs are required at every phase of work completed, and typically long payment terms with customers demand a cash flow strategy to pay workers and handle monumental working expenses. Adding wells or new employees compounds the financial challenge, and most businesses can only grow as much as their cash flow allows.

Oil workers also secure formal contracts called master service agreements (MSAs), which are required to work directly with the biggest oil producers and operators. Work can be completed as a subcontractor without an MSA, but direct relationships require MSAs outlining insurance requirements, agreed-upon services, payment terms and more. Greater success and higher income comes with multiple MSAs in place, although this adds complexity to running an oilfield business from a cash flow perspective. MSAs further demand a cash flow strategy to ride out 60- to 90-day payment terms common to these agreements. Subcontractors without MSAs face a similar issue since they are on the farthest end of the payment hierarchy.

Cash flow plan

A/R financing is optimized to support businesses based on MSAs and contract work and functions as a straightforward solution that provides consistent cash flow. While it may be new to some oilfield workers, factoring is a long-established financing method. It is a financial transaction where a business sells its accounts receivables (or invoices) at a discount to a factoring company (or factor), enabling the business to gain immediate access to its cash.

In contrast to bank loans or credit cards, which don’t easily fit the oilfield business model, funding is tied to approved invoices, known in the oil patch as tickets.

The factoring process is not concerned with the contractor’s credit and focuses instead on the oil company paying the ticket. Oil workers are granted rapid access to cash by selling their tickets to the factoring company at a discount in exchange for payment in as little as 24 hours. Contractors are paid quickly, and the factoring company takes on the role of the A/R department, easing the administrative load and leaving the contractor to focus on the job itself.

Startups qualify for factoring. Because the process is based solely on invoices, it requires no financial review or underwriting, and there are no predefined limits to factoring funds. Oil workers can choose which customers to factor, and the availability of immediate cash remains in step with new contracts, ideal for any firm in expansion mode. No interest accrues, and no debt is added to the company balance sheet.

Fueling the oil and gas business

The factoring process starts with the seller generating an invoice for work completed; that is, the oil worker completes the work, has the sign-offs and produces a ticket. Rather than providing it to their customer (the oil company that employs them), they agree to work with a factor and sell the ticket to them. The factor issues a notification to the debtor (the oil company being invoiced) that payment should be issued to them instead of the oil worker, which results in a simple change in the “remit to” address for payment. The factor in turn provides immediate funds to the oil worker in the form of a cash advance, typically a high percentage of the face amount of the ticket. When the debtor actually pays for the services invoiced, the factor pays the seller the remaining balance (the reserve) minus its discount fee for handling the transaction.

In addition to receiving customer payments quickly, the factor can act as the oil worker’s A/R department and assist with back office support. This can be attractive for individuals or smaller contract firms in particular, adding value by creating a larger business image and handling tasks that are difficult to manage on the road or from the field.

Capitalizing on the boom

With long hours, desolate locations and demanding work schedules, this is an industry that many don’t stay in for an entire career, making it even more essential to capitalize on the boom with staying power and financial resources. Garnering multiple contracts and MSAs makes the most of the boomtown opportunity at hand, yet a cash-strapped contractor may opt out of the additional insurance requirements necessary to win the next MSA, either because the working capital is not available or simply to protect the cash flow it does have.

Expanding with new MSAs compounds these issues exponentially with larger crews, increased operating expenses and additional equipment. It’s a very lucrative problem, but it is still a problem. Waiting months for the money to come in can jeopardize any oilfield entrepreneur, adding potential for debt, stressing business operations or even losing the next job to a better-funded worker.

Working capital strategies such as factoring are optimized for the oil field, eliminating the financial bottlenecks that come with complex payment processes and extended terms. Oil workers are bypassing stringent financial review, avoiding debt added to the business and receiving funds electronically, often within 24 hours of processing invoices. Most importantly, invoice-based financing is providing a means to maximize earning potential, ensuring that growth remains in sync with the business at hand and providing operating capital for winning new customers or tapping new wells.

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