What Is The Oil And Gas Factoring Process?
The gas and oil industry has been around for decades but the advancement of technology has both hindered and helped the industry. Expanded technology has made distribution and manufacturing in mass amounts much easier but that means the competition can do the same. A price war has been plaguing the gas industry. For some the low prices to get one over on a competitor ends up creating a loss of money despite the quantity of gas being bought and sold. That means gas companies are going to need to borrow money to keep day-to-day operations afloat. This is where oil and gas factoring comes into play.
Factoring in the industry is also known as invoice discounting, a practice often used by smaller companies when they are just starting out and need an advance for cash flow to get the ball rolling. Oil and gas companies do not require cash at the time of the sale so when their goods and services are sold it creates an invoice. That invoice is like a debt-owed therefore the company does not receive cash until the invoice is paid in full. This allows customers to take their specific time allotted to pay back the amount owed and that helps create a long-term relationship built on mutual trust.
Oil and gas factoring is a pretty easy and concise way to ensure oil and gas companies get the money they need to stay in business during times of low price competitions. The money that customers owe, or invoices, are bought by banks or third party companies that give an average of 70%-80% of the invoice in a cash advance for the company to use as needed. The person in debt is told that the invoice has been sold off and is still responsible for paying the debt to the known third party or bank. Once the debt is paid the invoice is cleared and then the fees are deducted by the third party. Both the gas and oil companies and third party factors get what they need and the debt is repaid.
There are two types of factoring that can be used by gas and oil refineries. Non-recourse factoring and recourse factoring. Non-recourse factoring means the third party or bank takes responsibility for the loss if the invoice is not repaid. This is not a commonly used practice but it does happen. It truly depends on what company or bank is being used as the factor. Recourse factoring is when the oil or gas company signs a contract with the third party that if the invoice is not repaid within the agreed upon time (usually 30-90 days) the factor may go after the original company for the debt owed. This is the most commonly used factoring even though it puts the pressure of invoice payment on the borrowing party.
Gas and oil factoring isn’t just for the actual refineries. Many companies that are responsible for gas and oil pipelines will use factoring during bigger jobs where money is growing tight. Other companies that are in charge of site separation and maintenance will use factoring to get the job done on time or purchase supplies to fix an unforeseen problem.
The gas and oil industry consistently has ups and downs depending on the state of the world and trade situations. Factoring is an excellent way to restart cash flow during a dip without losing customers or stalling necessary work for gas and oil related sites. Research your options before making the best decision for your company or site.