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How Do I Start A Transport Or Logistics Business?

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Forecasts indicate that the demand for freight transport will grow in South Africa by between 200% and 250% over the 15 to 20 years.

Some corridors, (high volume transport routes that connect major centres), such as the corridors between Gauteng and Cape Town (which amount to 50% of all corridor transport) will increase even faster.

The scope in the transport and logistics industry is varied – from a one-man show using a small truck to transport goods and offer services, to a fleet of transport vehicles which travel the length and breadth of South Africa’s roads.

Road transportation includes commuter transport from taxis to bus transportation.

It can be a tough industry and there are many threats facing transport businesses but if you get it right, you can build a successful business.

Director Mike Johnston of Transport Concepts, a transport and distribution consultancy, says that starting a transport business can be tough. It is a hard industry for start-ups not just because it is capital intensive, but because you need to be reliable.

Credibility is critical for a start-up transport company as any businesses requiring transport services has to know you are not going to let them down

Threats facing the transport business are not just crumbing and congested roads and highways, traffic fatalities and injuries, but financial issues as well. “Don’t over indebt yourself. Take it slowly and make sure that you have the necessary skills. By this I mean, you might have the driving skills and licences, but you also need financial and business skills.”

“It’s best to have mentorship before you embark into this industry. Some of the areas you need to understand include the Traffic Act, operating cost estimates, licence fees, toll fees, maintenance and the escalation of fuel and other costs as well as vehicle performance formulae and terminology”.

Remember there are vehicle schedules, staff duty rosters, maintenance programmes to worry about. Avoid running a business that is demand-responsive (ad-hoc jobs) because this results in operations being random rather than planned. Think about each job offered and ask yourself if it’s what you are looking for, will it be profitable? If not, rather walk away,

The transport and logistics industry is an easy business to enter, but the trick comes in sustaining the business. The transport business has a ‘low barrier to entry’ at the bottom of the market, meaning that anyone with a ‘bakkie’ or a minibus can start offering transport services. This results in a flood of competition at the bottom end of the market.

In many instances the entrepreneur starts these businesses with little to no capital, relying instead on revenue derived from the business to cover all overheads from day one. This lack of capital curtails marketing activities that may result in increased income.

With fierce competition, operators cut prices to survive barely making enough to cover their expenses. This naturally leads to a distressed business that is unable to survive.

Before starting a transport and logistics company, do your homework. Work out how you will build a sustainable business. Seek out customers and contracts BEFORE you start the business because transport contracts don’t magically appear later on.

How To Get Funding

The transport business has a ‘low barrier to entry’ at the bottom of the market, meaning that anyone with a ‘bakkie’ or a minibus can start offering transport services. This results in a flood of competition at the bottom end of the market.

In many instances, the entrepreneur starts a business with little to no capital, relying instead on revenue derived from the business to cover all overheads from day one. This lack of capital curtails marketing activities that may result in increased income.

Where to go for finance when starting a transport and logistics business

  • Commercial Banks. Commercial banks will finance vehicles used in the transport industry. Before you approach the bank for funding you must be able to show the bank that you have the necessary expertise to run a business by producing a well constructed business plan. You will need security (personal surety and or assets) to cover the loan amount that you need.

  • Khula Start-up Fund. Khula Start-up Fund has been created to empower South Africa’s historically disadvantaged entrepreneurs to establish new enterprises. Individual solutions are structured after having assessed the potential return of the venture and level of risk. Loans are repaid over a 5-8 year period SME’s can apply for finance between R150 000 to R3 million.

  • IDC Metal, Transport and Machinery Fund. The Industrial Development Corporation assists entrepreneurs to finance vehicles, components and accessories as well as diverse transport products such as boats, planes and trains. Repayment is usually made over 5-10 years depending on the risk profile.

  • Protect your credit record

    If you do not have a good credit record, no one will want to loan money to start a business, especially commercial banks. It is very important to communicate regularly with your bank, and service your accounts responsibly. By having a good credit profile, you are over the first hurdle.

    Find out what documents the bank needs

    Contact the bank and find out what information the bank will require before applying for a loan. It always makes a good impression when you are organised.

    Show the bank you have the expertise

    Before approaching a bank, you must be able to show them that you have the necessary expertise to run a business by producing a well-constructed business plan.

  • Security is required

    You will need security (personal surety and or assets) to cover the loan amount that you need. It is important to show the bank realistic cash flow projections and balance sheets for two to three years.

    Understand how banks operate

    Create a careful breakdown of what finance you need, vehicles, start-up capital etc. Banks are usually departmentalised. For example, Standard Bank Vehicle and Asset finance division has a team of transport specialists who can advise you on the most suitable finance options with regard to buying vehicles, but they won’t be able to help you with regard to start-up capital.

  • You should have collateral

    In order to borrow, privately or through commercial banks you must have collateral. South Africa’s big four banks offer the standard range of credit – overdrafts, revolving credit, term loans, business mortgages, vehicle and asset finance, property finance, and debtor finance. So if you want a loan of R100 000, you have a R10 000 deposit the bank many grant you a R100 000 loan if it considers you a good risk. Collateral can be in the form of a property, an insurance policy, someone standing surety, or a combination of these.

    Rather seek finance in isolation

    Once you have the vehicle finance, approved approach the banks Small Business Division for Start-Up capital. By seeking finance in isolation (department by department), it’s much easier to get approval. If you have, though the help of your mentor, secured a contract to transport goods, this too, will make it much easier to get finance, especially if vehicle finance has already been approved.

    Consider government funding

    There are a variety of Government Funds that have been created to empower South Africa’s historically disadvantaged entrepreneurs to establish new enterprises. Individual solutions are structured after having assessed the potential return of the venture and level of risk.

    A partner could be the solution

    If you do not have a deposit and cannot get approval for financing, consider taking a partner who may be able provide the necessary deposit.

    Consider renting

    If you are unable to get funding, consider renting instead of purchasing a vehicle and begin your business on a modest scale.

  • What Are The Costs Involved

    One of the most important things to do in order to run a successful transport company is to understand your costs. Don’t take short cuts and remember quality controls and stringent maintenance to vehicles is crucial,” says Mike Johnston, director of Transport Concepts, a transport and distribution consultancy.

    Besides capital outlay for equipment and vehicles, other expenses have to be considered:

    • Garage or other facilities for vehicles stored at business premises

    • Additional security features – e.g. immobilisers and tracking equipment

    • Routine servicing and maintenance of vehicles

    • Repairs for scratches, wear and tear (tyres) or accident damage

    • Fuel costs

    • Cleaning

    • Parking costs incurred for business use

    • Toll charges incurred for business use

    • Accounting/invoicing

    • Traffic fines

    • Marketing and advertising programmes

    • Salaries and benefits for staff.

    • Vehicles roadworthy

      By law, any vehicle using South African public roads has to be “roadworthy”. The responsibility of scheduling and taking a vehicle in for roadworthy testing rests solely on each individual vehicle owner.

    • Regardless of how vehicles are paid for, the cost of financing a transport business is the biggest expense which has to be dealt with. Make sure you do your homework and have an understanding of the different options available when it comes to paying for vehicles. You can consider the following options:

      1. Financial Lease

      • No upfront cash is needed

      • A lease is flexible and can be “tailored” to suit specific cash flow

      • Use of vehicles is funded from revenue

      • Ownership remains with the lessor

      • Rentals must be paid when due, regardless of cash flow start-up

      2. Extended Rental Agreement

      • Fixed rentals are a hedge against inflation

      • Instalments can be paid from the revenue generated by use of the vehicle

      • Be clear about exclusions

      • Understand what portion of the rental is allocated to the maintenance component of the lease if there is one, and how this is set to escalate over the period of the agreement.

      3. Installment Sale (often includes a Maintenance Lease)

      • A small amount relative to the total purchase price is paid as a deposit

      • Instalments can be paid from the revenue generated by use of the vehicle

      • Fixed instalments assist budgeting.

        4. Outright Purchase – pay cash for the vehicles

        • You can negotiate discounts

        • Can be financed by employing overdraft fund

        • Shows on the balance sheet as an employed asset

        • Disadvantage include depreciation and maintenance

        Whichever finance option you choose, it will have an affect on the cost of operating your transport company, the taxes you pay and the profits you can make.

        What type of insurance is needed for a transport and logistics company?

        • Drivers’ liability: You must have insurance for drivers’ liability for injury to others, including passengers, and for damage to other people’s property resulting from the use of a vehicle on a road or other public place.

        • Comprehensive insurance: Which covers damage to vehicles as well as third-party liability, fire and theft, as well as sufficient cover for the goods transported in terms of damage and theft.

    Where to find a contract or customers for my transport business?

    There are almost 4 000 road freight businesses registered with the TETA; many of these are small businesses, and they will be your most direct competition. To determine your target market the first step is to do in-depth research that will help you define who your customers are.

    This is known as market research and it is this collection and analysis of information about consumers and your competitors that we help you plan your marketing strategy.

    • Manufacturers: They need their raw materials delivered to their workshops or factories

    • Agriculture: Farmers use road freight haulers to move their animal feed, chemicals such as fertiliser and pesticide, livestock and agricultural products are transported by road

    • Wholesalers: They need to have their stock delivered to their warehouses or wholesale outlets.

    • Smaller services: Refuse removal, garden clean-ups, furniture and office movers.

    Advertising your services

    • Get your name out there. Try advertising in the local newspaper, or listing in the classified section of community newspapers in your area. Another successful avenue is the buying an ad in the Yellow Pages.

    • Apply your business name, logo and contact details on to vehicles, to raise awareness when vehicles are out on the road.

    • Join associations such as the Road Freight Association or the local chambers of commerce so that you can network with companies operating in your area.

    • Obtaining contracts

      In order to be successful in obtaining business contracts you have to demonstrate that you have experience in the industry and that you can sell your business based on a high standard of business principals and ethics. Ensure that you can offer a better service that no one else can.

      If you have a history in the industry, it makes it much easier to win contracts.

      1. Speak to owners of similar businesses and make yourself known. The best source of information you can find about an area of business, is other business owners. One way for smaller operators to secure contracts is through sub-contracting. Subcontracting occurs when a transporter contracts to a third party and not to the principal. The subcontractor subcontracts to an established transport company which has the contract with the principal but perhaps does not have the capacity to carry out the contract.

      2. Make contact with businesses such as manufacturers, wholesalers and retailers to see if you can tender for work to deliver their goods.

        As a small transport business, you can approach transport brokers and secure contracts through them.

        Before accepting a contract though a broker, discuss the terms of the contract with your mentor, so that you have the proper checks and balances in place.

        As a small transport business you can approach transport brokers and secure contracts through them.

        A broker can take up to 20% of the contract value. “Be wary of who you choose to work with in the brokering industry as it is not well regulated and its wise to ensure that they are reliable and upstanding brokers”, recommends Johnston.

        There are almost 4 000-road freight businesses registered with Transport Education & Training Authority (TETA) of which many are small businesses, and they will be your most direct competition.

        Winning contracts takes hard work and it takes of lot of networking to develop strong relationships in the industry that you are approaching. Trustworthiness is another very important aspect.

        1. Offer a unique service

        Remember, there are so many companies offering a similar service you have to find a way to provide an incentive for a company to make use of your services.

        The way around this is to take a long hard look at your competition and offer something they don’t, such as faster turn around times, brilliant service or very competitive rates.

        2. Piggybacking

        Often an established transport company may not be able to meet their contractual commitments because of unforeseen circumstances. Offer to pick-up any overflow and sub-contract the delivery. It’s often last minute business but creates a good opportunity to prove yourself as a reliable supplier.

        3. Getting contracts from mining groups

        If you fit into the historically disadvantaged South African profile, large mining houses support smaller vendors in outsourcing various contracts. For example, Anglo Platinum is committed to support and develop black economic empowerment (BEE) suppliers in South Africa.

        It does so by supporting HDSA vendors in line with mining charter requirements. In other words, if you run a transport company and meet their qualifying criteria; Anglo Platinum may award a contract to your transport business.

        Most large mining houses are committed to awarding tenders to vendors that are ethically, socially, and environmentally responsible as long as the vendors comply with their business principles and code of ethics.

        To find out more contact the procurement departments who implement vendor social procurement programmes:

        • Anglo Platinum

        • Anglo Gold Ashanti

        • Sasol Small-Business Development Division

        These just a few of the many corporates that you can contact.

        4. Sub contracting

        One way for smaller operators to secure contracts is through sub-contracting. Sub-contracting occurs when a transporter contracts to a third party because they do not have the capacity to carry out the contract. The contractor subcontracts to a transport company who does not have the capacity to carry out the contract.

        5. Bidding for tenders

        A tender is an offer to do a particular job or supply particular goods or services at a particular price. To bid for the tender a business has an opportunity to put forward their services at their price to the organisation that has put out the tender. Many companies secure a good deal of work this way.

        To be eligible to tender for a contract

        • The business must have a good banking and credit record

        • Be a registered business

        • A record of delivering on time

        • Be registered with the South African Revenue Services

        • Make sure your tax is up to date

        Finding Tenders

        You can subscribe to Tenders South Africa who, on a daily basis, our extensive research network across South Africa tracks tenders and business leads from newspapers, gazettes, websites, tender bulletins, private companies, and public sector organisations.

        • The Bulletin is available online edition on the Dti’s site, or the SA Government Online site.

        • You can also subscribe by post to the Government Tender Bulletin for R34.20 per year, by contacting the Government Printer.

        • Seda have a dedicated page that features tenders that are available countrywide.

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