Case Study: A Uk Access Company
25 March 2008
The two partners of ‘ABC Platform €75000) of their own cash, raised by re-mortgaging their houses. Two leasing companies gave lines of credit totalling Ä150000 (€225000) at start up, which enabled them to acquire 12 new and used scissor lifts, and five booms. Much of the Ä50000 was used to pay deposits on the equipment.
After the first three months, some more leasing companies came on board, with another Ä100000 (€150000). After each successive six 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 Ä45000 (€68000) but had total debts of nearly Ä400000 (€600000), and 45 platforms. The second year, the company made a profit of just over Ä100000 (€150000), but had total debts of nearly Ä1.2 million (€1.8 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 Ä1 million (€1.5 million) plus of debts, which belong to a highly leveraged business.
After the first three years of adding fleet, unless this company's profitability increases suddenly, it will usually:
• slow down its debt (and fleet) additions and become cash generative;
• increase its growth rate rapidly as the banks get more bold;
• have debts spiralling out of control. This is true 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.