Banks assess your business before granting a loan
According to Kathy Bell, head: transport solutions at Standard Bank, cash flow based contracts are common in the transport industry in terms of sourcing funding for the assets and the overall business. However, the success of the business is totally reliant on a number of critical components.
For example, the contract needs to be concluded with an approved contract provider in a direct line of sight. In other words, if it is a coal transport opportunity then the transport operator needs to have concluded the contract directly with Eskom, not via a sub-contracting arrangement.
Qualifying criteria may include experience in the industry at an operations level, alternatively it may be structured in an owner-driver type model with a management support company providing some skills and services to transition a start-up into a viable transport service provider.
Revenue margins are tight in transport contracts and the operator needs to be able to adjust rates in terms of fuel, wages, toll fees, maintenance and interest rates as and when escalations are necessary.
Bell says that it is not recommended to source funding for start-ups on a sub-contract unless the contract provider is a significant player in the industry that meets the requirements of offering a solid and sustainable source of business.
The contract also needs to speak to volumes and tonne per kilometre rates that must specify the fixed and variable cost inputs of the transport rate, which needs to be adjusted on a formula or index basis. The transport operator also needs to have a detailed plan in place in terms of managing the routes, the loads and the drivers to optimise payload.
The plan must include what measures and controls will be in place to ensure that the vehicle/trailer combination unit complies and adheres to applicable legislation such as the Road Traffic Act and the regulations and the LRA in terms of driving hours and PRDP requirements.
Insurance on the load in terms of Goods in Transit (GIT) and the assets must be included in the rate and the terms need to be shared with the funder in terms of excesses that may put strain on working capital requirements. The type of combination unit needs to conform to the type of commodity or freight that needs to be transported, such as tandem, tandem side tipper link for commodities or a tridem taut-liner if freight is being transported.
A preventative maintenance schedule should ensure that the assets will be able to meet the transport schedule in terms of availability as required by the contract provider. Fuel arrangements need to confirm that the operator can run the business for at least 60 days before revenue starts flowing.
Fuel cards and toll cards should be included in working capital, either funding or preferably as start-up costs in cash. Such requirements should at least be confirmed prior to applying for the funding for the assets as the funder will need to assess this as part of the risk/viability of funding the transport operator.
Diane Worrall, internal brand and business communications, marketing division at FNB adds that banks will assess the company/ individuals ability to repay the loan, and that this assessment would include assessing the most recent financial information as well as the future impact the new contract would have on the company, gearing and cash flow.
The bank would also assess the business case, how long has the business been established, what current contracts are in place, who are the people behind the business and what is their track record. Lastly, banks would look at the security on the deal remembering that under a repossession the security of the truck would only secure the loan at around 50%, depending on the usage and maintenance programme.