Broker Failures Skyrocket as Shipper Payments Slow

This story appears in the Sept. 21 print edition of Transport Topics.

Freight broker failures have skyrocketed at least 74% in the past 12 months, as they are caught in a financial squeeze between some slower-paying shippers and the carriers who want to be paid promptly for hauling freight, industry officials said.

“There is a growing trend in broker bankruptcies,” Greg Conklin, executive director of sales and business development at First Advantage, Poway, Calif., a credit monitoring company, told Transport Topics. With the recession forcing shippers to stretch payment terms beyond the typical 30 days, Conklin said, 66 brokers have gone bankrupt since September 2008, compared with 38 in the 12 months before that.

The number of failures is far higher when a different measurement is used. Winston Astin, CEO of TransCredit, said 682 third-party businesses failed between July 2008 and July 2009 and no longer answer phone, fax or e-mail contacts.

“Many small operators just fade away instead of bothering to file for bankruptcy,” said Astin, whose firm maintains a listing of 18,000 brokers.

Acknowledging that failures have increased, Robert Voltmann, president of the Transportation Intermediaries Association, said, “It’s really a function of cash flow. These businesses are banks. They are paying the carriers long before they get paid by the shipper. If you have your cash flow compromised because shippers extend their payments — you’re dead.”

Conklin said broker failures peaked at 15 in October 2008 as the financial crisis deepened. Based on this year’s average of 5.1 a month, 61 brokers could go bankrupt during 2009, compared with 50 last year.

Broker bankruptcies that totaled 13 last quarter, based on First Advantage’s figures, trailed far behind the 370 fleet bankruptcies tallied in that period by Avondale Partners, because the businesses are different.

“You see more bankruptcy filings in asset-based entities simply because of the debt they incurred,” Conklin told TT. “Bankruptcies in brokerage are not as common. There is no ability to sell off assets since there are not a whole lot of assets to reorganize [through a Chapter 11 filing].”

Donald Broughton, author of Avondale’s carrier bankruptcy report, said it’s easier for a bank to foreclose on a broker, because there are few, if any, secured assets such as equipment with value that partially could be recouped.

Bankers have another incentive to foreclose on delinquent brokers, Broughton said, because “the bank doesn’t have to pay the poor trucker who is left out in the cold.”

However, brokers do have some advantages in a downturn.

“One of the beauties of a brokerage is that they can downsize more quickly,” Conklin said. “There is no equipment to park and no drivers to furlough.”

Astin cited two indicators of the mounting pressure on brokers: TransCredit’s average credit score for brokers has worsened to 85.2 from 88.1 early last year, and average days for brokers to pay carriers has slowed to 30.5 days from 29.3.

“Although that may not seem like much of a shift, when you consider the size of the industry, this amounts to around $2 billion to $3 billion worth of payments annually that are delayed to carriers,” Astin said.

Broker bankruptcies hurt others in different ways, the experts said.

“Broker bankruptcy is really unfair to trucking companies,” Conklin said, because they wind up not being paid for loads they have hauled. He recommended that carriers try to have themselves listed as critical vendors, so they are more protected in a bankruptcy proceeding.

When a shipper fails, the third party often receives nothing, because the brokers are unsecured creditors with no claim on the failed shipper’s assets, Conklin said.

“There is a growing philosophy in the [freight] industry that brokers should guarantee payment to carriers on behalf of shippers in the event of a broker failure,” he said.

Conklin advocates a trust that would ensure that brokers pay carriers out of the actual payment they receive from the shipper whose freight was moved.

Voltmann labeled such an approach as “the death knell of the brokerage industry.”

“If I [a broker] can’t use my free cash flow, how can [he] stay in business?” Voltmann asked, adding that truckers with one to five tractors would also suffer, because they rely on brokers to find freight.

“The brokers that are especially suffering are the ones whose business is concentrated with a smaller number of customers,” said Darren Brewer, president of Carrier411 Services, Norcross, Ga., a carrier monitoring service. “If one or two or three of those core customers substantially reduce their business, the broker will pay the ultimate price.”

Conklin said brokers face trouble if cash flow needs drive them to factor — or borrow against their receivables — at the same time shippers are slowing down their payments.

Fleets should be wary if a broker’s days to pay the carrier reach 51, Conklin said, because that is a sign the broker likely will fail.