When Oilfield Factoring Makes Perfect Sense
It’s no secret that oil prices are low. With the price of crude under $50 per barrel, many oilfield operators are feeling the pinch of shrinking margins. These oil & gas companies have had to dramatically “reconfigure” their business model and cost structure or risk closing their proverbial “doors”. According to a Bloomberg article by Mark Shenk;
“Current low oil prices are making some U.S. oil production less profitable.” and “Despite the expected decline in monthly crude oil production, U.S. total output this year is forecast to be the highest since 1972.”
As a result of this sustained price pressure, many businesses are looking for working capital that was once so abundant. For these companies, oilfield factoring is a real solution. During periods of declining margins, volume becomes the name of the game, and it’s difficult to handle an increase in volume if you are constantly waiting for your customers to pay.
Oilfield Factoring Example
The math on whether to factor or not is quite simple…if it makes you more “absolute money” then it’s worth it. For the first part of this example let’s assume that your company is currently grossing $100K a month and to keep things simple has a profit margin of 20%.
We can see that the monthly gross profit is $20,000 ($100,000 X 20%).
Unfortunately, your company is cash strapped and can’t continue production until it has collected from its customers because it needs that capital to cover operating and overhead costs. As a result, your company is probably operating at half capacity all the time or full capacity just half the time while you wait for payment.
The result is that you’re stuck at the $20,000 monthly gross profit mark until something changes because you literally can’t afford to increase production.
So how does oilfield factoring help? Well, here you go:
Let’s assume your factoring fee is 2.5%, but since you get paid immediately by factoring your invoices, you never have to stop production. As a result, you are able to run full time at full capacity. Since in this example you were only running at half capacity before, you’ve now doubled your monthly revenues to $200,000 a month giving you a monthly gross profit of $40,000 before deducting factoring costs. If you had factored every invoice, total factoring costs would have been $5,000 bringing gross profit to $35,000 after consideration of factoring fees.
Time to Get Started?
As you can see, factoring clearly makes sense in this scenario since it allowed you to double total revenues while increasing your gross profit by $15,000 or 75% a month. While this example is an oversimplification of a more complicated decision, it helps to illustrate the fact that accounts receivable factoring makes an enormous amount of business sense when it adds real dollars to the bottom line. If you’d like to learn more about the invoice factoring programs we can provide, please Contact Us at anytime, we’ll help you get funded in no time.