The oil and gas industry is a booming industry since these are naturally collected from the earth. It has been noted that not only privately-owned companies but also government parastatals are working tooth and nail to invest in the industry.
With the constant increase in demand, the provider and receiver of the oil would have to reach an agreement on how best they can reimburse each other.
Just like any other business, the oil sellers also sell their goods on credit but they require cash flow to continue their day-to-day operations.
It is therefore very beneficial to have a factoring company. In the oil and gas industry, a gas factoring company would be the most appropriate.
You may have an understanding of what factoring is but did you know that there are different types of factoring? The following are the different categories of factoring:
Recourse and non-recourse factoring
Recourse factoring is where the factor does not take up the risk of non-payment by debtors. The factor is, therefore, allowed to get back the funds from its client.
Non-recourse is where the factor takes up the credit risk and no amount of money will be demanded from the client.
Domestic and export factoring
In domestic factoring, there are three parties involved that are the buyer, seller, and factor who operate in the same country.
Export factoring involves four parties since there are two factors involved and they all operate in different countries.
This type involves the factor doing all the tasks from the collection of the credit to credit insurance.
In regards to factoring one may wonder, who is eligible to apply factoring in their oil and gas industry?
Any company with creditworthy clients is eligible. An example of eligible groups are suppliers, contractors, and consultants in the main areas where oil and gas are used.
What procedure should be followed in oil and gas factoring?
After the oil and gas company has agreed on the reimbursement period, and an invoice is sent to the customer the oil and gas company should also make a point to send an invoice to the factor.
Once the invoice is received it is verified and a credit check is conducted on the client by the factor.
From there the factor will then give the client a significant percentage of the money.
Once the customer pays the invoice in full, the factor will then deduct the discount and any additional costs. The cost for the factoring is included in the discount and additional costs.
Funds obtained from a factoring company can be used in the following areas of the oil and gas industry:
- Settling of salaries of the employees such as engineers, chemists, and general builders.
- Ensuring that regulatory matters such as permits and licenses are dealt with.
- In transporting equipment to the extraction sites.
- Maintaining and repairing the equipment used on the site.
- Purchasing crucial supplies on the site.
Factoring companies assist companies to obtain working capital promptly. One can, therefore, always be sure that their business will operate smoothly. Oil and gas companies should consider applying factoring in their companies. This will help them grow at a fast rate and compete with other companies.