Where the requirement arises
The requirement almost always comes from the supply side. An oil company appointing a dealer, a wholesaler opening an account for a reseller, or a supplier granting bulk terms to a commercial user will make security a condition of the credit facility.
The settings below are the ones most commonly encountered in the South African fuel market.
Common fuel guarantee settings
- A retailer taking over or opening a site and requiring a credit line from the oil company or wholesaler supplying it
- An existing retailer seeking an increased credit limit to support higher volumes or a second site
- A wholesaler or reseller buying product for onward supply to commercial customers
- A transport, mining, agricultural or construction operator buying bulk diesel on account for its own fleet or plant
- A fuel business changing suppliers, where the incoming supplier requires its own security
- A commercial user operating bunkering or on-site storage supplied on credit terms
How the amount is set
The guarantee is normally sized against the maximum exposure the supplier can be carrying at any point in the payment cycle, not against annual purchases. The calculation is driven by the volume drawn within the credit period, the prevailing price per litre and the payment terms granted.
This is why the required amount moves without the business doing anything. When the fuel price rises, the same number of litres represents a larger rand exposure, and the security that was adequate at a lower price may no longer support the same volume. A retailer that grows throughput, or extends trading hours, moves the figure again.
Reviewing the guarantee against actual drawn volumes and current prices, rather than leaving it at the level set when the account was opened, avoids the situation where deliveries are held up because the credit limit has been reached mid-cycle.
Why suppliers insist on security
A fuel supplier delivering into a customer's tanks has parted with product that is immediately consumed or resold. There is no meaningful recovery available if payment is not made: the product is gone, and the value of the equipment at the site is small relative to the debt.
The retail sector compounds this because the margin is thin. A site can be trading at high volume and still have very little cushion, so a single bad month, a supply interruption or a shortfall in the shop can move a well-run business into difficulty quickly.
The result is a market in which credit is granted freely against security and reluctantly without it. For a new entrant, the guarantee is often the practical barrier to entry rather than the capital cost of the site itself.
How a fuel guarantee is underwritten
The assessment is a credit review of the fuel business, informed by the operational characteristics that drive its cash generation. Throughput, margin per litre, shop contribution, staffing and site management all matter because they determine whether the business can settle within the credit period.
Experience carries particular weight in this sector. An operator who has run a site before, and who understands stock reconciliation, wet stock losses, shrinkage and the discipline of settling on time, presents a different proposition from a first-time entrant with the same balance sheet.
Information usually requested
- Annual financial statements and recent management accounts
- Monthly throughput by product, and the trend across recent months
- Current supply agreement or dealer agreement, and the credit terms sought
- The credit limit required and the payment cycle it must support
- Wet stock reconciliation records and any history of unexplained losses
- Shop and forecourt contribution where the site has a convenience offering
- The operator's experience of running comparable sites
- The counter-indemnity, and any suretyships from directors or the site owner
What happens if the guarantee is called
If the supplier is not paid and calls on the guarantee, the guarantor pays and then recovers from the fuel business under the counter-indemnity. The guarantee does not write off the debt; it moves the creditor.
That is worth stating plainly because the guarantee is sometimes treated as a formality in the account-opening pack. Where directors or the site owner have signed suretyships supporting the counter-indemnity, a call reaches beyond the operating company.
The guarantee is not cover for the site
This distinction is important and frequently blurred. A fuel guarantee answers a credit obligation to a supplier. It does nothing about the physical and liability exposures of operating a fuel site: the tanks and lines, the pumps and canopy, the shop and its stock, environmental exposure from a leak, injury to a customer on the forecourt, and the loss of income if the site cannot trade.
Those are the subject of a conventional insurance programme built for fuel retail operations, and a site that is well secured on credit terms can still be badly exposed on the operational side.
Read the fuel retail insurance guide →
Interruption is the exposure that connects the two
A site that cannot trade still owes its supplier for product already delivered. Damage to the forecourt, a tank failure, an extended outage or a loss of access can stop income while the credit obligation continues to run.
That is the point at which the credit arrangement and the insurance programme meet, and it is a sensible thing to think through before it happens rather than afterwards.
Read the business interruption insurance guide →
COMMON QUESTIONS
Fuel guarantee questions, answered clearly.
What is a fuel guarantee?
It is security provided to an oil company, wholesaler or supplier so that a fuel business can buy product on credit terms. The guarantor undertakes to pay the supplier if the fuel business does not, and then recovers that payment from the fuel business under the counter-indemnity.
Why does a supplier require security to open a fuel account?
Fuel is delivered in large rand amounts on short payment cycles, and once it is in the tanks there is nothing meaningful to recover if payment is not made. The exposure between delivery and payment is large relative to the size of most fuel businesses, so credit is normally granted against security.
How is the amount of a fuel guarantee calculated?
It is normally set against the maximum exposure the supplier carries at any point in the payment cycle, based on the volume drawn within the credit period, the price per litre and the payment terms. It is not calculated on annual purchases.
Does the guarantee amount change when the fuel price moves?
The required amount effectively does. A higher price means the same litres represent a larger rand exposure, so a guarantee set at a lower price may no longer support the same volume. Reviewing it against current prices and drawn volumes avoids deliveries being held up mid-cycle.
Can a new fuel retailer obtain a guarantee?
It depends on the financial position of the applicant, the credit limit sought and the operator's experience. Experience of running comparable sites carries particular weight in this sector, so a first-time entrant is generally assessed more conservatively than an established operator.
What information will be requested?
Financial statements and management accounts, monthly throughput by product, the supply or dealer agreement and credit terms sought, wet stock reconciliation records, shop and forecourt contribution, and details of the operator's experience.
Does a fuel guarantee cover damage to my site?
No. It secures a credit obligation to a supplier. The tanks and lines, pumps and canopy, shop and stock, environmental exposure, liability to customers and loss of income are dealt with by a conventional insurance programme built for fuel retail operations.
What happens if I cannot pay and the supplier calls on the guarantee?
The guarantor pays the supplier and then recovers from the fuel business under the counter-indemnity. Where directors or the site owner have signed suretyships, the recovery can extend beyond the operating company.
Can I use one guarantee across multiple suppliers?
Each supplier normally requires its own security on its own terms. A business changing suppliers should expect the incoming supplier to require a fresh guarantee, and should ensure the outgoing one is formally released.
What happens to my credit obligation if the site cannot trade?
The obligation for product already delivered continues even if income stops. That is where the credit arrangement and the insurance programme meet, and it is worth considering how an interruption would be funded before it occurs.
