Take It to the Bank

Ten days to pay, 30 days or more to get paid.

That’s the dilemma that fuel oil distributors know so well, especially now that the price of product is so steep. A fine-tuned working relationship with a bank, for that all-important line of credit, is crucial to operating successfully in the current market, said a fuel oil distributor and bank executives.

Jeff Buckley, owner and operator of Buckley Heating & Air Conditioning, Warwick, R.I., said that during the 2007-2008 heating season his company went to its lender three times for an increase in its credit line.

‘I’ve been in this business for thirty-seven years,” Buckley said, ‘and for the majority of my time we didn’t have much of a banking relationship. We didn’t need it. If oil was $1.50 a gallon and we bought 100,000 gallons we only needed $100,000. Now 100,000 gallons is four hundred grand. So it’s more important than ever to have a great banking relationship. You can’t live without it.”

Buckley has said his company’s annual heating oil volume is almost seven million gallons. At a price of, say, $3.60 per gallon, Buckley said, ‘buying 70,000 gallons a day, we need a couple million dollars every time we pay the bill.”

Buckley has had a line of credit with Citizens Bank for a number of years. Citizens Bank is part of Citizens Financial Group, Inc., a $160 billion commercial bank holding company headquartered in Providence, R.I.

‘Every time that we ask them for an increase we go through due diligence on where we are with receivables,” Buckley said. ‘We have to show them the aging” and demonstrate that the company is exercising due diligence in collecting debts.

Buckley said that the bank is exceptional in that it will lend based on the value of his company’s customer list, normally considered an intangible asset by most banks.

‘A lot of banks will only lend based on tangible assets,” Buckley observed. ‘If trucks are worth $500,000 and your building is worth $500,000, they will lend based on those assets.”

Citizens Bank has a program that factors in the customer list as ‘the majority of the value in a fuel oil business,” Buckley said.

There is good precedent for valuing the customer list; in acquisitions, the acquirer typically evaluates the customer base of the fuel oil distributor being acquired. ‘That could be 65 percent of the value of the whole entity,” Buckley said.

Numerous factors are weighed in valuing the customer base, beyond the amounts each customer has paid for heating oil each year. Customers who pay full margin, have a service contract or are committed to a budget plan are valued more highly than others. A customer who has purchased a boiler has added value. Likewise, long-term customers ‘ Buckley Heating & Air Conditioning has been doing business with some for decades ‘ are valued more highly than newcomers.

By using the customer list as the primary basis for lending, Citizens Bank has made a crucial difference to his business, Buckley said.

‘If we’re buying five million gallons at four dollars that’s $20 million,” he said. ‘So where do we get the value in our organization to borrow on? Citizens has made it really easy by using our customer list.”

Jeff Simpson, vice president of energy lending for Citizens Bank, said the bank’s lines of credit to fuel oil distributors are generally tied to accounts receivable and inventory levels. That is typical in the industry. For example, if accounts receivable come to $100,000, a bank might extend a credit line for 85 percent of that: $85,000.

The lender defines what can be considered an eligible receivable. Typically, an account that has not been paid for 90 days cannot be considered a legitimate receivable for borrowing purposes, Simpson said.

Other assets on which the credit line can be built include inventory, both in bulk storage and on trucks. Typically the bank will advance 50 percent of the value of the fuel inventory, Simpson said, ‘value” being defined as the current market value of the fuel.

The interest that Citizens Bank charges is usually based on the London Interbank Offer Rate.

New Challenges

With the price of heating oil at an all-time high, collecting has become increasingly challenging, and the bank has an interest in seeing that distributors do as good a job as possible of getting customers to pay their fuel oil bills, so that in turn the distributor can pay down the line of credit.

‘A common issue is what we call, in banking parlance, ‘a slow-down in receivable turn,’ meaning [consumers] are slower to pay because they’ve taken on a much larger burden because of the price of the fuel,” Simpson said. When the high price of heating oil causes financial stress to homeowners, ‘they tend to pay more slowly or pay in smaller chunks.” Another concern is that once summer comes, ‘paying the heating bill is not so much a priority any more,” Simpson said.

‘Dealers who are really on top of things are recognizing that this is an issue, and they’re also recognizing that if they don’t get paid by their customers they can’t pay their line down, so they’re putting extra effort into collections,” Simpson said. ‘They’re adding staff or maybe even outsourcing.”

Buckley has two employees working full-time on collections.

‘The average house uses 800 gallons,” Buckley estimated. When the price was $1.50 a gallon, ‘they were looking at 1,200 dollars to heat their home.” In the season that has just ended, heating oil was well over twice that amount and causing a strain on many household budgets.

How are customers coping?

‘A lot of people are putting it on credit cards, paying a hundred dollars a month,” Buckley said. At that rate, ‘next November, when we get into the heating season, they’ll still be paying [the balance] from the winter before.”

Regarding the collections efforts of his employees, Buckley said it’s all individual and handled on a case-by-case basis. In some cases where a customer hasn’t the means to pay the bill, ‘we’ve asked them to maybe get their family members involved,” Buckley said, which might mean asking whether a son or a sister can help.

Citizens Bank, for one, generally abstains from advising its oil distributor borrowers how to manage collections. ‘We know best practices that our customers employ,” said Matt Ide, the bank’s senior vice president of energy lending. ‘When we’re asked, we pass along our observations of well-managed companies.

‘A lot of the well-managed companies are using this high-price environment as an excellent opportunity to get customers onto budget programs,” Ide said. ‘We’re seeing a very big push to get customers onto budget programs.”

Ide offered a hypothetical example to illustrate the position of some fuel oil distributors and the banks to which those distributors apply for lines of credit. In the example, a distributor who moves an average of three million gallons of fuel oil per season might have had a $500,000 line of credit in previous years. Today, that distributor might need a line of credit for three times as much in order to purchase the same amount of fuel because the cost has increased so sharply and because consumers are taking increasingly longer to pay their bills. And the distributor in this example needs that bigger line of credit just to make the same amount of money as in previous years ‘ possibly less because of pressure on margins.

As a result banks are taking a harder look at applications for increased lines of credit, according to Ide.

‘In general the banks are under a tightening of credit,” he said. ‘Some dealers don’t see it because they’re very good customers. Other dealers may be feeling it.”

Distributors who expect to need a bigger line of credit for next heating season should talk to their banks as early as possible ‘ even as early as the preceding spring, Ide said.

Finally, Ide and Simpson advised that distributors ‘keep in mind what is driving the need for a credit line.”

What sometimes happens is that dealers use a credit line to purchase a truck, increase capacity at a bulk facility, make up for losses in hedging, and the like, Simpson said.

The purpose of a credit line, Simpson stressed, is to help fuel oil distributors manage commodity costs so they can ‘turn receivables into cash.”

Borrowing and the diversified business

Nearly ten years ago Buckley Heating & Cooling expanded into propane, buying a used truck and a truckload of propane tanks to get started. Today the company sells 1.3 million gallons of propane per year, with about 3,700 tanks in the field. Two years ago Buckley installed two 30,000-gallon propane storage tanks at its base in Wakefield, R.I.

Apart from the benefit of adding another dimension to the business, and growing it, a fuel oil distributor who expands in this way might also gain some flexibility in its use of a credit line, according to Jeff Simpson, vice president of energy lending for Citizens Bank.

That’s because propane or diesel distribution could be expected to generate customer payments year-round. A more constant revenue stream, as opposed to the seasonal nature of the fuel oil business, could make a lender more comfortable when it comes to allowing a balance of some kind to remain on a credit line during the summer.

In contrast, distributors who deal exclusively in heating oil typically are required to make monthly interest payments during the heating season, ‘and then as they move out of winter and receivables come in, they use that money to pay down the line,” Simpson said.

That expectation is usually reinforced by a ‘clean-up provision” in lines of credit for fuel oil distributors ‘ meaning they are required to take the line down to zero in the summer.

‘The reason for that is to demonstrate to the bank that the borrower is using the line for its intended purpose, which is short term working capital,” Simpson said. ‘By the summer there should be little or no balance on the line.”