Operational Financing Helps Bakken Businesses Explore Opportunities

Understanding the invoice factoring process
By Andy Balgord | July 31, 2013

The rise in oilfield activity in the Bakken has opened doors for businesses offering a wide range of services. Businesses from across the country have flocked to the Bakken, interested in exploring the emerging opportunities and expanding their foothold within the industry.
While opportunities for growth are present within the Bakken, exploring them is not always an easy task. Sustained growth requires capital, and a great deal of it. Unfortunately, cash flow is a major issue for many business owners—the long pay delays that are common within the industry can leave owners waiting up to 90 days for payment for services rendered or product delivered.

When more money flows out of the company than comes in, cash reserves can quickly become depleted, leaving business owners without the capital necessary to explore opportunities. Business owners with negative cash flow may not have the capital needed to cover the upfront costs of materials, labor, equipment and fuel required to bid for or complete a project.

While the costs of doing business in the oilfield industry are relatively clear, sources for operating capital are not. In the current economy, commercial lenders are hesitant to extend financing to business owners.

For business owners who are unable to obtain a traditional bank line of credit, the prospects for expansion and continued success may seem bleak. There are alternate options for obtaining the necessary capital, however, including the invoice factoring process.

Understanding Invoice Factoring
Also known as accounts receivable financing, invoice factoring is a financial transaction in which a business sells a completed work invoice for instant cash. Rather than waiting 30 to 90 days for payment from a customer, oilfield businesses can factor their invoices and obtain the operating capital they need to take on more business. 

Invoice factoring companies offer quick cash payments for work completed by oilfield businesses. If a water hauling company, for example, completes a job for a customer and invoices its client for the work, a factoring company will purchase that invoice and pay part of the amount to the water hauler the very same day. The factoring company will keep the remaining invoice balance, known as a reserve, in an escrow account until the invoice has been paid by the original debtor. Once payment has been received, the reserve, minus any fees, is released.

Unlike traditional bank lines of credit, factoring arrangements are not based solely on the creditworthiness of their customers. While credit is considered in some cases, factoring companies consider the value of their customers’ accounts receivables and other details when underwriting a financing agreement.

Each factoring company has different qualification criteria for invoices that it will purchase, and varying processes through which it offers operating capital. Advances can be made through wire transfers, electronic funds transfer using an automated clearing house, deposits to fuel accounts and via check.

The costs of the factoring process vary from company to company, and are often based on the volume of invoices factored on a monthly or yearly basis. Factoring companies will also charge interest on the advance, with the amount charged based on the time it takes to collect payment from the original debtor.
Meeting Business Needs
Without incurring debt or tying themselves to a high interest loan, business owners may obtain operating capital quickly and affordably through the factoring process. Whether a business owner has fallen behind on the financial obligations of the company, or has experienced substantial growth and needs funds to take on new projects, factoring fills a need that many business owners may one day encounter.

Kraig Gunwall, sales manager at Burnsville, Minn.-headquartered oilfield financing company TCI Business Capital, offered additional insight into the benefits of the factoring process. “Invoice factoring is a viable option for business owners who have completed a job, but cannot afford to wait for payment for that work,” he said. “In many cases, factoring can provide the operating capital a business owner needs to address a cash flow issue, and to meet the financial obligations of the business. Even when banks have already said no to a business owner, factoring may still be a viable option.”

Certainly, as companies within the Bakken continue to explore additional opportunities and banks continue to maintain strict lending qualifications, factoring process will remain a viable option to obtain the operating capital necessary to achieve success.


Author: Andy Balgord
TCI Business Capital