By Jeff Simpson
Fuel dealers have been facing some unprecedented conditions this summer which have a real potential to strain cash availability during the 2022-23 heating season should they persist. The primary factors impacting the industry of late include:
- Historically high commodity costs
- Basis blowout
- Rising tank & equipment costs
- Supply chain issues (difficulty building equipment inventory)
- Slowing customer receivables
- Increased cost of hedging
- Reductions in fuel pre-buys
- Rising cost of capital
- Static wholesale supplier credit lines
- Increased payroll, insurance and fuel costs
All of these factors are conspiring to squeeze you this winter and many in our industry are now realizing the impact could be significant. The good news amidst this raft of bad news is that owners and managers have time to plan before the chilly days return and your need for cash to support seasonal operations grows again.
Perform an Honest Assessment
As you evaluate your cash need, it is important to determine if perhaps there may be more to your company’s story than just the factors noted above. For example, have the receding benefits of COVID-related cash flow programs such as the Paycheck Protection Program and Employee Retention Tax Credit exposed inadequate earnings targets? Has your bank line of credit balance been growing due to the purchase of long-term assets such as vehicles, propane tanks or other capital improvements? Did you wait too long to raise your fuel and service profit targets for fear of losing customers? Were your pricing programs inadequately hedged during the spring and early summer as we experienced the extreme commodity cost rise? These less obvious factors may be further driving a working capital deficit at your company, so it is important to undertake an honest assessment of your cash and/or borrowing needs.
Beware the Impact of the “Double Whammy”
Now is the time to plan for the potential “double whammy” of both sustained high commodity prices and a slowdown in accounts receivable as consumers struggle to absorb the higher cost to heat their homes. These drivers could quickly result in inadequate line of credit availability and in rising borrowing costs as line of credit balances reach new heights for longer periods of time. Rising interest rates will further contribute to rising operating costs.
Assessing the best approaches to preserve cash and make a request to your bank will be dependent on your company’s specific strengths and weaknesses. While many companies rarely borrow on a line of credit and enjoy a strong cash position, just as many have been heavily reliant on their line of credit to support seasonal operations and struggle to build cash until the end of the heating season. Most companies fall somewhere in the middle.
Explore the Borrowing Program that Works Best for Your Company’s Situation
The truth is that targeted gross profit increases on fuel and service activity this winter are necessary and will help with cash availability, but an earnings increase alone may likely not be enough to produce the necessary liquidity for the reasons noted above. Therefore, it is recommended that you approach your bank now to discuss increases to your borrowing capacity. Decisions by banks can take weeks or months, particularly if the ask is large.
The primary financing options available to dealers include both traditional lending – typically for borrowers with stronger credit profiles – and SBA guaranteed borrowing programs. SBA loans can carry higher closing fees but typically carry very favorable terms. Discuss these options with your financial advisor or accountant to determine which approach will work best for you. While a simple line increase will benefit many dealers, a more comprehensive debt restructuring may be necessary.
- Revolving Line of Credit
- Equipment Line of Credit
- Term Loan
U.S. Small Business Administration Programs (funded via your local bank)
- 7(a) Loan – term loan
- 504 Loan – term loan for fixed assets
- Express Line of Credit – up to $500,000
- Seasonal CAPLine – up to $5,000,000 for seasonal increases of A/R and inventory
- Working Capital CAPLine – up to $5,000,000 to finance short-term working capital and operating needs
Recurring cash flow is typically the most important factor banks will analyze when you approach them for financing, however your collateral mix will also be examined. It is ultimately up to your bank to determine if vehicles, real estate, inventory, propane tanks in the field, customer list value or other assets will support their loan to your company. Start a conversation now with your existing banker to see what is available to your company, but keep in mind another bank may be a better fit if you run into challenges securing the financing you need to tackle these unprecedented times.