Case study: a UK access company

20 March 2008

The two partners of 'ABC Platform Hire' easier not to contemplate their houses. Two leasing companies gave lines of credit totalling +150000 at start up, which enabled them to acquire 12 new and used scissor lifts, and five booms. Much of the +50000 was used to pay deposits on the equipment.

After the first three months, some more leasing companies came on board, with another +100000. After each successive 6 months, and after their first year, more mainstream banks provided cheaper and cheaper lease finance.

After the first year, the company had turned a profit of +45000 but had total debts of nearly +400000, and 45 platforms. The second year, the company made a profit of just over +100000, but had total debts of nearly +1.2 million and nearly 100 platforms.

The profit is reassuring, but if the business continues to build debts at more than five times the rate it accumulates profits, it will probably find no larger rental companies will want to acquire it. Also, the owners are now personally liable for +1 million plus of debts, which belong to a highly leveraged business.

After the first three years of adding fleet, unless this will usually either:

• slow down its debt (and fleet) additions and become cash generative;

• increase its growth rate rapidly as the banks get more bold;

• debts can risk spiralling out of control, even for large companies, and we have seen several companies disappear over the years.

• bring in investment, usually a venture capitalist to “fill the tank” with capital for continued growth.

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