Fuel Guarantee Benefits to the Retailer

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.

Fuel Guarantee Advantages

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.

Our Fuel Guarantee has been approved by

  • Sasol
  • Excel
  • BP
  • Total SA

Fuel Guarantee Quotation Information

New To Industry Sites

  • Our standard initial application form
  • 12 months financial projections for fuel sales in litres (split between petrol and diesel because of different margins), as well as any other profit centres.
  • Projections should be on an income statement basis, reflecting gross profits, overhead expenses and expected net profits. (Business plan is sufficient).
  • Details about capital structure (eg. Loan amount, working capital available after payment of purchase price, bank overdraft facilities)

Existing Sites

  • Our standard initial application form
  • Most recent six months trading data. (All figures excl.VAT)
  • Most recent business banking account statement.
  • Last three months management accounts
  • Last three months operating costs
  • Last available annual financial statements (income statement and balance sheet)
  • Financial statements of site under previous owner management (If available)

Colateral requirements & Risk Monitoring

  • Unlimited personal surety ship
  • Business surety ship (All figures excl.VAT)

Broker Network

  • Brokers are essential in spreading the product into the market and therefore we only make use of brokers
  • We refer direct approaches from potential clients to brokers of our choice in that specific region
  • Brokers earn 10% of premium as a commission.
  • Broker interaction with clients on the Fuel Guarantees are less labour intensive than on Short Term Commercial
  • We have a fairly well established broker network, but are always keen on expanding this and therefore welcome any opportunities to grow

Cost & Benefit

  • Annualized cost in a corridor of between 4,5% and 7,5% of the value of the guarantee at risk.
  • Price depends on the quality of risk and site performance and whether or not short term insurance is placed with Garagesure as well
  • Premium payable on a monthly basis (or annually) in advance, upon inception of the guarantee
  • Premium includes an annual administration fee of 5% of the premium amount and VAT
  • The premium is a tax deductible expense to the business
  • VAT can be claimed back, further increasing the net saving to retailer
  • Typical cost calculation example:

Guarantee = R350,000.00
Premium = 5,5% per annum
VAT = 14%
Admin fee = 10% of premium
R350,000.00 x 5,5% = R19,250.04
VAT = R2,695.00
Admin fee = R2,194.56
Total = R24,139.56 per annum
= R2,011.63 per month

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Underwritten by Compass Insurance Company Limited, a registered short-term insurer and financial services provider (FSP: 12148)