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Educate Your Bank Loan Officer

Both wholesale and retail petroleum industries are unique. Because most bankers do not specialize in petroleum, the burden falls on you to educate your banker. Here are the key points to cover:

1) Per-gallon profit and expense analysis. Because of price volatility in petroleum, the only way to accurately analyze costs and profitability is on a per-unit (which happens to be gallons) basis. Bankers are highly accustomed to traditional percentage-of-sales method analysis. Using this method, when prices rise, it will appear as if gross margins have plummeted even when the cents-per-gallon margin has held steady. A banker educated in per-gallon analysis will not be caught off guard from profit percentage swings due to price changes.

2) Supply, demand, price and cash flow. A naive banker’s expectation is that when fuel prices rise, marketers make more money. Nothing could be further from the truth and they need to be educated about supply, demand, pricing and cash flow. Particularly if you are a wholesaler, your banker needs to be made aware of the cash flow drain on your company during times of rising prices. (Last month’s column about beating the cash flow crunch from rising prices clearly explains the cash timing squeeze between receivables and payables when prices rise.) Since you will likely heavily dip into your bank line when prices rise, your banker should be prepared.

3) Low current ratio. Most bankers have been trained to expect and demand a 1.5 to 1 current ratio where the total current assets (cash, receivables and inventory) are 1.5 times the current liabilities (trade payables, accruals and current portion of long-term debt). Because of the unique nature of our high-volume, low-margin industry, however, a margin of 1.1 to 1.2 is quite normal and very adequate to meet operational needs.

4) Capital intensity – To survive and thrive in our industry, money must be spent constantly — to gain a commercial contract account, it often takes a considerable investment in equipment; on the retail side, it’s imaging and expansion. From a banker’s perspective, three things about this are important.

First, you must convince them you spend wisely using net present value analysis for project decisions. (If you want to really impress them, show them The Site Planner economics screen for feasibility analysis using hurdle rates.) Second, your ongoing capital needs often have a short fuse which means you need a specific pre-approved annual capital equipment line to accommodate you quickly. Finally, your banker must be careful about matching the duration of your loans to the underlying asset lives. In simple terms, When you buy stuff that will last five years, use five-year notes.

Don’t wait until you need money to educate your banker on these four industry distinctions. Do it now.

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