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How The Canadian Petroleum Industry utilizes Receivable Finance Instead of Banks

An alternative source of financing that is widely utilized in Canada’s petroleum industry is Receivables Financing. This alternative to bank loans is also known as A/R financing, accounts receivable financing or factor financing. Factor financing allows Canadian petroleum companies to obtain the cash they require to run the business without incurring bank loans and accruing interest on those loans.

Receivable financing provides funds to the business without the need for a traditional bank loan. The cost of a bank loan, combined with the approval process for such a loan, is prohibitive to many petroleum companies in the industry. In addition, the company runs the risk of defaulting on the bank loan and losing essential equipment or, in a worst case scenario, the entire business.

Retaining Operating Cash

In the petroleum industry, customers are provided with the product and then presented with an invoice. The terms of the invoices are typically “Net 30“ or “Net 60.” This means that the balance of the invoice comes due in 30 or 60 days, respectively. Petroleum companies need cash flow in order to build their customer base and conduct business. These companies that do not have access to a large fund of cash have only a few options for maintaining enough cash on hand to continue to pay suppliers, meet payroll and generally do business.

1.) Ask customers to pay invoices early

The petroleum company may request that customers pay invoices prior to the 30 or 60 day due date. In such cases, the petroleum company may offer an incentive for early payment, such as a 2 percent discount on the original invoiced amount. However, some customers may also be cash-strapped and may not be able to pay invoices early, even with the discounts applied.

2.) Pay suppliers late.

If a petroleum company has a good credit rating, one option for retaining cash is to pay suppliers late. However, this is not always possible and if the business has a good credit rating prior to implementing this practice, they may not have that rating for long in doing so.

3.) Obtain a bank loan.

Petroleum companies may apply for a bank loan to maintain operating cash. However, to assess the companies credit-worthiness, the bank will consider the total assets of the company, including real estate, equipment, credit history, etc. Bank loans may be difficult to obtain for some companies and still other companies refuse to pay the interest that will be assessed to the loan.

4.) Receivables Financing

A fourth and better option than any of the previous three is the option of receivables financing. With receivables financing, Canadian petroleum companies may essentially sell their outstanding invoices to a factor, a company that will purchase the invoices for a percentage of the value of the receivables.

Receivables Financing Explained

Factoring companies generally purchase invoices for between 70 and 85 percent of the total value of the receivables. The factoring company assumes the responsibility of collecting the invoices and, in turn, the company’s commission is the 15 to 30 percent differential between the price paid for the invoices and the full price of the receivable.

The transaction provides petroleum companies with the operating capital to do daily business while the factoring company profits from collecting the invoice payments from customers. No interest is accrued on the transaction because the transaction is not a loan. There is no underwriting or approval process for factoring financing. An agreement is reached between the factoring company and the petroleum company with regards to the percentage of the petroleum company’s outstanding invoices will be offered, and the percentage of the total value of the invoices that the factoring company will pay to purchase the receivables.

Factoring: Less Risk for Business

Factor financing offers petroleum companies the opportunity to generate cash while retaining full ownership of their company with virtually no risk. The petroleum company avoids risk of defaulting on a bank loan and losing equipment, property or the entire business.

In addition, some fee structures are flat fee based and there is no interest charged on the cash provided by the factoring company in the transaction because the transaction is not a loan. It is an outright purchase. Many Canadian petroleum companies utilize factoring companies to generate operating cash with no risk.

Factoring Company Benefits Offered to Petroleum Companies

Depending on the Canadian factoring company, many incentives are available for petroleum companies to utilized factoring instead of traditional bank financing.

- Quick turnaround for cash.

Many factoring companies offer a very quick turnaround time for the petroleum company to receive the necessary operating cash. Some factoring companies even offer a 24 hour turnaround time for the transaction.

- Online applications and approvals

Some factoring companies offer their application process entirely online. In addition, the approval process is conducted online and the petroleum company receives fast notification of the factoring company’s offer.

Factoring is a viable option that is utilized by many Canadian petroleum companies to retain operating capital without posing unnecessary risk to the company. In addition, petroleum companies do not need to qualify for traditional bank loans to obtain the cash they need to conduct day to day business and generate new business.

Currently, receivables financing is driving segments of the oil and gas industry. For example, the shale oil and gas segment heavily utilizes receivables financing to maintain cash flow. Shale oil and gas companies are able to attract and take on bigger contracts while expanding the industry as a whole. The more the petroleum industry expands, the better for the Canadian economy. Factoring companies offer many incentives for Canadian companies in the petroleum industry.