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Oilfield invoice factoring turns approved invoices into cash before an operator pays them. A hauling, well servicing, equipment rental, roustabout or other field service company sells each invoice to a factoring company and receives an advance soon after the work is approved, and the factor then collects from the operator. The fee is a discount taken from the invoice value. Because the factor is buying the operator's promise to pay, approval depends heavily on the operator's credit, a clean signed field ticket and how disputes are handled.
How oilfield factoring works
- The job is completed and the operator's representative signs the field ticket.
- You invoice the operator, often through the operator's own billing or approval system.
- The factor verifies the invoice with the operator and confirms there are no disputes.
- You receive the advance, a large share of the invoice value, often within days of verification.
- The operator pays the factor under its normal payment terms.
- You receive the balance, minus the factor's fees.
The first funding takes longer than later ones, because the factor has to set up the account, verify the operators and file its paperwork.
Oilfield service companies tend to face the same mismatch described in our look at why oilfield service providers rely on fast funding: fuel, payroll and equipment costs come due weekly, while operators can take 30 to 90 days or more to pay. Factoring moves the cash forward without taking on a conventional term loan. Whether a given agreement is accounted for as a sale of receivables or as a secured borrowing depends on its terms, recourse provisions in particular, so check the treatment with your accountant.
What oilfield factoring costs
Factoring is priced as a discount on each invoice rather than an interest rate. Some factors charge a flat percentage for a set period, while others charge in tiers that grow the longer the operator takes to pay. On top of the discount, agreements may include application, verification, wire or minimum-volume fees. Our breakdown of invoice factoring rates shows how to turn those charges into an effective annual cost. Ask for a written fee schedule and a sample settlement on a typical invoice before you sign.
Recourse terms matter as much as price. Under a recourse agreement, you buy back invoices the operator does not pay. Non-recourse agreements shift specified credit risks, commonly an operator's insolvency, to the factor. Our guide to recourse vs non-recourse factoring explains the differences.
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What factors look for
Operator credit. Factors focus on who owes the money. Invoices to large, well-capitalized operators are easier to place than invoices to small or financially stretched ones.
Concentration. A service company that bills one operator for most of its revenue carries concentration risk. Factors may cap how much they will advance against a single customer.
Clean paperwork. Signed field tickets, matching purchase orders or work orders and invoices that follow the operator's billing rules reduce verification delays.
Operator approval. Many operators require contractors to keep insurance and pass safety prequalification before invoices are approved. Factors may confirm you are in good standing, since a lapse can delay approval.
Disputes. Pricing or quantity disagreements on a ticket can hold up an entire invoice. Factors generally will not fund disputed amounts until they are resolved.
Lien rights. Many oil and gas states give contractors lien rights for unpaid work. In Texas, Chapter 56 of the Property Code gives a mineral contractor or subcontractor a lien to secure payment for labor or services related to mineral activities. The claimant must file a lien affidavit with the county clerk no later than six months after the debt accrues, and a subcontractor must notify the property owner at least 10 days before filing. Whether a lien is available depends on the contractor's role, the work performed and meeting the statute's requirements, so have counsel review the deadlines and how any lien rights interact with a factoring agreement.
Factoring or a line of credit?
A bank line of credit is usually cheaper when a service company can get one, but lenders size it to the company's own balance sheet and may require covenants and collateral the company does not have. Factoring is sized to the receivables, so it can grow as the company bills more work for creditworthy operators. Some companies use both, with factoring covering a large operator's slow-paying invoices and a line handling everything else. The right mix depends on margins, operator payment terms and how steady the work is. The gas and oil funding page outlines other financing uses in the sector.
Read the agreement before you sign
Oilfield factoring agreements vary widely. Check whether the operator must be notified to pay the factor directly, whether you must factor all invoices or can choose, the minimum monthly volume, the contract length and termination fees, and whether the factor will file a UCC financing statement covering all receivables. Our checklist of factoring agreement terms walks through each clause.
Getting ready to factor
- A list of the operators you bill and their usual payment terms.
- Recent invoices with signed field tickets.
- An accounts receivable aging report.
- Details of any existing loans or liens on receivables.
- Formation documents and insurance certificates.
- Contacts in each operator's accounts payable team.
Activity in the oil patch also rises and falls with prices. When operators slow drilling or stretch payables, a factor's appetite for a given operator can change quickly, so it helps to know how your agreement handles operators the factor stops approving.
If you apply through BusinessCapital.com, invoice factoring is one of the products an oilfield service company can be matched with. Funds from unpaid invoices are typically available in two weeks or less, subject to how the factor views the operator and the invoices.
Frequently asked questions
What is oilfield invoice factoring?
It is the sale of approved invoices owed by oil and gas operators to a factoring company, which advances most of the invoice value and collects payment from the operator.
How quickly can oilfield invoices be funded?
Once a factor has approved the account and verified an invoice, advances can arrive within days. Setting up a new factoring relationship takes longer.
Will the operator know I am factoring?
Usually, yes. Most oilfield factoring is notification factoring, so the operator is told to send payment to the factor.
Can a new oilfield service company use factoring?
Often, yes. Because factors weigh the operator's credit heavily, a young company with creditworthy operator customers may qualify sooner than it would for a bank loan. Expect the factor to check each operator before approving invoices.
What happens if an operator disputes a field ticket?
The factor generally will not advance against the disputed amount until it is resolved. Signed tickets and invoices that follow the operator's billing rules help prevent disputes.
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