Companies that are in the directional drilling and/or directional boring industry have an interesting predicament. Their customers are usually utility companies or large oilfield service companies with good commercial credit and great payment track records. The problem is that they often demand trade credit and pay slowly – they can take anywhere from 30 to 60 days to pay an invoice. In the meantime, you have to deliver the work and cover all your expenses – equipment, payroll and rent to name a few.
A problem for small companies
Most small and growing directional boring companies are not well capitalized, as the owners usually reinvest all the money in the business and don’t have funds set aside for emergencies. The problem is that a few delayed invoices can drain the reserves and leave the company without any money to pay bills. Soon, this escalates into a major cash flow problem.
Ask for quick payments – if you can
One way to deal with this situation is to try and accelerate payments by offering quick payment discounts to your utility and oilfield clients. For example, offering 2% net 10 terms (2% discount if they pay in 10 days or less) is common. This will work for some, but many customers will chose to pay you slowly because they want to conserve their own cash. If this does not work, the alternative is to use invoice factoring to accelerate your revenues.
How does factoring solve the problem?
Construction factoring solves the cash flow problem by accelerating the revenues that are tied to slow paying invoices from credit worthy companies. It provides you with a quick payment for your slow paying invoices, relieving your cash flow pressures and improving your company’s liquidity.
The transaction is fairly simple and is structured using an intermediary company, called a factoring company. They advance funds to your company using your receivables as collateral. They pay you and then hold the invoice until your customer pays. The transaction is then settled once your customer pays in full on their regular schedule.
Easier to get. Fast to deploy
Factoring is easier to obtain than conventional business loans and lines of credit. This is because the transaction uses your invoices from strong customers as the main collateral, so your company does not need to have the hard assets that most financial institutions require. Also, to qualify, your company must be clear of legal and tax problems.
Another advantage is that most financing lines can be underwritten and funded fairly quickly. The average turnaround time is between 5 and 10 business days.
Grows with your company
One important benefit of financing your receivables is that the line is flexible and will grow with your company. It will increase to match growing revenues. It will also help you increase sales, especially if you have been averse to offering payment terms. The line will enable you to offer credit terms because it minimizes the problems associated with slow paying invoices.
Factoring invoices can be a great solution for directional drilling / boring companies that have cash flow problems that stem from slow paying customers.