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Factoring OilField Companies in the UK

Posted on May 28, 2014 in Factoring

Thirty- to 90-day pay terms are standard in the oil industry and slow payment turnaround is all too common. Some larger companies are more flexible but the smaller oilfield and oilfield transportation companies often need additional help maintaining their cash flow. Oilfield factoring services provide the oilfield companies the needed flexibility necessary to meet their current obligations while continuing to grow the company. Oilfield factoring companies offer cash flow solutions such as invoice and freight factoring. Many factoring companies offer other services such as risk assessment and collections in addition to their cash flow solutions.

Invoice Factoring

Meeting requirements for factoring is easier than meeting requirements for a bank loan. The invoice factoring transaction is not a loan. And the oilfield factoring company is not a bank. The primary requirement for obtaining factoring is based on credit worthiness determined by the oilfield company’s fixed assets.

Invoice factoring offers a cash flow solution that allows the oilfield company to meet its expenses and acquire new customers without incurring debt or added concerns about lagging payments. The oilfield company uses its receivables as collateral, and sells its invoices, or accounts receivables, to the oilfield factoring company to ensure they have funds readily available for payrolls and equipment and operations expenses such as maintenance and equipment purchases and upgrades. The factoring company is an intermediary that disperses the advances as well as manage settlements and complete regularly scheduled customer transactions.

The factoring company purchases the oilfield company’s invoice in two installments. 1) The first installment, which is typically 90% of the invoice amount, is purchased as soon as the customer accepts the work. 2) When the customer pays, the factoring company pays the oilfield company the other 10%. A factoring fee is charged and deducted from the total received.

Freight Factoring

Having invoices go unpaid for more than 30 or 45 days is creates a hardship on oilfield transportation companies. Freight factoring is an offshoot of invoice factoring. Oilfield transportation companies typically use freight factoring to help offset cash flow problems created by slow paying customers. Routinely freight bill factoring companies purchase trucking invoices at a discount and in turn pay the freight carriers for the purchased receivables.

Factoring for freight brokers is a more complicated and specialized service. Various laws define the “carrier of record” as the company hauling the load indicated on the bill of lading. Freight brokers contract with others and do not actually haul the load. When the freight brokers are not listed and not the carrier of record, the factoring company risks not getting paid. The factoring company must ensure the invoices are getting paid and the carrier of record is not owed for any of the invoices.

UK Regions Utilising Oilfield Factoring Services

The UK is second to Norway in oil production and has a distinct advantage with its offshore Continental Shelf (UKCS) regional oil and gas drilling operations. Many new licenses (approximately one-fifth) were issued to small exploration companies in 2010. Main drilling operations are concentrated in the Central, Southern, and Northern North Sea regions. Other operations are in the Irish Sea and west of Shetland.

Industries Utilizing Factoring Services

Factoring is a targeted and useful tool for smaller, start up and newer high growth potential companies that may be considered too high-risk for bank loan financing. Although some SMEs with overdrafts, outstanding loans, and poor cash flow are discouraged from seeking accounts receivable funding. This can be attributed to lack of awareness of factoring requirements, fees and costs, or sector disadvantage.
Factoring services are offered to a variety of businesses in many industries based on “the risk of their receivables.” The oilfield, gas, and petro industry is just one of them. Wholesalers, manufacturers, construction, business services and temporary staff agencies, and retailers may qualify for invoice factoring as well. GE Capital Europe is one of the top factoring companies using AR (accounts receivable) financing.

According to GE Capital’s “The ‘AR Factor’ The economic value of Accounts Receivable Finance to Europe’s leading economies, October 2011” (available online at http://www.gecapital.eu/en/arfactor/reports/GE_report_EN.pdf) the following industries that utilize or have the ability to utilize accounts receivable factoring financing have been surveyed and monitored and more specifically include: Agriculture, forestry, and fishing, real estate, rentals and business services, construction, communications, wholesale and retail, extraction, financial services, government and community services, transport, power, gas, and water utilities, manufacturing, metals, metal products, and fabrication, chemicals and manmade fibers, computers and office equipment, electrical engineering, food, beverages, and tobacco, coke, petroleum and nuclear fuels, mechanical engineering, motor vehicles and parts, paper, printing, publishing, precision medical and optical equipment, rubber, and plastics, textiles and clothing, wood and wood products and other manufacturing.
Top Industries Utilizing Factoring Services

Manufacturing is the largest UK factoring seeking and utilization industry. It is followed by Retail, Business Service, and Financial Services respectively. Businesses classified as “Other Services” such as government and social services round out the top five industries engaged in utilizing factoring accounts receivable services.
Other industries making use of the more flexible factoring services include Transportation, Primary Industry such as energy exploration, oilfield, gas, petro drilling operations, Construction, and Utilities.

Conclusion

According to the European Central Bank, [2011] Survey on the Access to Finance of SMEs in the Euro Area: September 2010 to February 2011, even though accounts receivable (factoring) financing has become increasingly utilized and well-received, it is still generally not a routinely used financing option compared to time-tested bank loans and instruments. Only 19 percent of European SMEs were evidenced in a recent survey as having used or currently using factoring services and accounts receivable financing. The survey also indicated that 51 percent of companies opted to lease or rent equipment to reduce their costs and expenses or just failed to meet their financial obligations which resulted in a 50 percent of overdrafts.

The choice to utilize or not use factoring as a financial tool equally impacts employment and job growth. Reports speculate that if factoring becomes a more widely used instrument in industries that approximately 311,000 more jobs may be added by the year 2020.