Due to the nature of the fuel business and the high cost of holding stock, cash flow is one of the keys to the success of your business.

The business needs to generate enough revenue to meet daily, weekly and monthly expenses, and at the same time maintain stock levels to ensure uninterrupted trading in accordance with the fuel companies’ requirements. The retailer thus needs sufficient working capital to meet the demands of large fuel payments.

In order to do this, the retailer either takes out a large loan or provides an adequate overdraft facility. The need for a bank guarantee is over and above these requirements.

Without a guarantee, the retailer effectively trades on a ‘hard cash’ basis. Revenue needs to be in the account prior to payment for fuel, and delivery is only scheduled subsequent to payment. This working capital required is costly.

In the event of a bank guarantee being issued, the retailer can enjoy the benefits of ACB payment for fuel, after delivery. This adds several days deposits to the bank account improving cash flow considerably, but the bank guarantee is also costly to the retailer in terms of opportunity costs of having such funds available in the business.

With the introduction of an insurance type product, the fuel guarantee alleviates the need for a cash on demand guarantee and allows the service station owner to utilise his or her capital where it is best required – in the business! Having more capital in the business can improve the cash flows further and reduce any loan risks or trading risks.

The Fuel Guarantee does not require the retailer to tie up personal or borrowed funds in a bank account ceded to the fuel company. If personal funds would have been used, the opportunity cost on the returns on investment of the funds is great. If borrowed funds, there is a cost to servicing this loan.

For Example:

• If the retailer had R200,000 in funds (personal or borrowed), the funds would be better utilised in the business itself, as opposed to being tied up. The capital injection could allow the site to trade in a credit balance, earning interest instead of paying it, or it could reduce the bank overdraft and thus save on interest on overdrafts, which is costly.
  The guarantee is also an operating cost in the business and thus can be offset against taxable income.
• If the retailer were taking out a loan to buy the business, the fuel guarantee would reduce the capital amount that one would have to borrow, and thus the retailer would enjoy the benefit of cheaper repayment instalments.
• Often a retailer can’t borrow all the funds that he needs to cover the purchase of the business, stock, as well as provide for the guarantee. This is often due to not having enough collateral security to offer the bank or have enough liquid cash to put into the business.
• Often the retailer has an existing guarantee in place, secured by collateral, but the fuel company has requested a higher guarantee. The retailer than has no additional capacity to satisfy the fuel company’s needs.
• With the guarantee, the retailer can trade on ACB, which will improve the weekly cash flows considerably.