Lenders Tighten Standards for Truckers Seeking Credit
By Daniel P. Bearth, Senior Features Writer
This story appears in the April 21 print edition of Transport Topics.
Rising fuel costs, weakening demand for freight hauling and the subprime lending crisis are making it tougher for drivers and trucking companies to qualify for financing to buy equipment.
Lenders, in fact, are tightening credit standards in response to deteriorating trucker balance sheets, industry analysts said.
“Credit is only being extended to the best-quality, well-capitalized customers,” Andrew Casey, a senior analyst for Wachovia Capital Markets, said in a March 19 report to clients.
Casey said his checks with 12 truck dealers’ financing departments show delinquencies have risen “in the last 30 to 45 days, and default-repossession rates are expected to continue to rise as increased operating costs limit trucker ability to make payments.”
Lenders also no longer are issuing credit to borrowers with C-rated or D-rated credit and have increased down-payment requirements to 20% from 10%, said equipment wholesaler Tom Walther of Nationwide Equipment in Boise, Idaho.
“Everyone’s very cautious,” Wal-ther said. “No one’s buying big groups of trucks or trailers because no one wants to get caught when the music stops.”
One sign lenders are seeking to avoid getting caught: Jay Caron, president of Bee-Line Corp., a Springfield, Mass., equipment sales and rental firm, said he is getting more requests for inspections from banks and leasing companies concerned about their collateral’s condition.
“We’re getting very busy with one-off transactions and with mom-and-pop fleet operators,” Caron told Transport Topics.
Although he has not seen an increase in re-possessions, Caron said his inspections show that some fleet operators are forgoing maintenance, which is a sign of financial distress.
Another sign of a trucking credit crunch is an increase in activity for companies that provide freight bill-factoring services.
“The majority of our transactions are coming from traditional lenders that are unwilling or unable to extend credit,” said Eric Myers, director of business development for Transfac Capital in Salt Lake City.
“Some of that is due to companies not able to meet covenants,” he said, “while other turndowns have come from lenders unable to extend credit in the wake of real estate and other losses in their portfolio.”
In a typical factoring arrangement, a finance company advances a percentage of freight bills to the trucker in return for the right to collect the full amount of the invoice from the shipper.
The need for factoring is growing because many shippers are taking longer to pay their bills, said Al Chapman, general manager of FactorLane.com, a new service that matches trucking companies with finance companies.
Chapman said small and mid-sized companies take an average of 34.8 days to pay, while some large companies can take more than two months.
“Every year, the amount of time it takes companies to pay their invoices increases,” Chapman said. “There are many small companies wanting to do business with a large company but cannot afford to have capital tied up for months.”
Another sign of the times is the fact that drivers are asking Bobby Berkstresser, the owner of Lee-Hi Travel Plaza in Lexington, Va., for more time to pay fuel bills.
“Companies are not making money,” Berkstresser said.
Such difficulties with cash flow portend a more dire situation: More trucking companies are going out of business.
Jason Seidl, an equity research analyst with Credit Suisse in New York, said, “We expect truckload bankruptcies to continue to in-crease for the following reasons: one, truckload carriers are not able to recoup fuel surcharges for all miles driven, due to deadhead miles and idling, and, two, the majority of truckload carriers are smaller mom-and-pop type operators who do not have easy access to capital to stay afloat.”
Increased competition among lenders for creditworthy customers may have helped one fleet, Arrow Trucking Co. in Tulsa, Okla., negotiate terms for the purchase of trucks to replace its entire 1,400-truck fleet over the next five years.
Arrow President Doug Pielsticker said the deal with Daimler Truck Financial will “consolidate our tractor and trailer financing at very favorable terms.”
Meanwhile, independent truck owner-operators’ financial condition appears to be worsening.
Todd Amen, president of American Truck Business Services, a firm that provides accounting and bookkeeping services for about 40,000 owner-operators, said average net income for his clients declined in the fourth quarter of 2007 for the first time in more than four years.
The average earnings of ATBS clients in the last three months of 2007 was $12,850, compared with $13,500 in the fourth quarter of 2006.
“We expected that because of the spike in fuel costs and slow freight,” Amen said.
Another factor behind the drop in earnings is the fact that owner-operators are driving fewer miles.
Amen said the average ATBS client traveled 115,000 miles in 2007, compared with 140,000 miles in 2006.
Part of the reason for the drop-off in miles is the new federal hours-of-service rules, which limit the time drivers can spend on duty.
“The slow economy is part of it, as well,” Amen said. “Drivers might have to work more when times are slow, to increase revenue.”
The slump presents particular difficulty for drivers seeking to become independent. Many fi-nance companies have stopped doing business with first-time truck buyers, said Jason Rush, president of Cobalt Finance, a company that specializes in financing used trucks.
“It’s been very hard on first-time owner-operators,” Rush said. “As fuel increases and freight comes down, it’s not a good mix.”
Rush said loan delinquencies are currently running “higher than normal” but aren’t increasing, so he remains optimistic.
“It’s a viable business. We’re still committed to lending, but we’ve tightened up our standards. We want to focus on quality, not quantity.”
Because many banks have cut back on lending for the purchase of trucks, Amen of ATBS said he sees increased demand for trucking companies to offer lease-to-own programs for company drivers.
ATBS launched a leasing program about a year ago that combines financing with financial and management advice to keep drivers on track.
“We teach them how to manage money,” he said.
Early results of the program have been positive, Amen said, with drivers achieving better-than-average earnings and staying current on payments. Only 1.5% of ATBS clients in a $3 million loan portfolio are more than 30 days past due on truck payments in contrast with 8% to 10% past due among other subprime lenders, Amen said.
A similar effort at Fikes Truck Line in Hope, Ark., has been set up by Jack Milligan, director of special projects and president of Higher Roads, an organization that helps truck drivers with personal and business goals.
“Many drivers want to get out on their own,” Milligan said, “but too often, we see them get in over their heads, and quickly.”
In the program at Fikes, qualified drivers can lease a good used truck for no money down through Master Lease Inc., Henderson, Colo. The company helps to set up an escrow account for maintenance expenses and offers automatic payroll deductions for truck payments, plus bookkeeping and tax preparation assistance and favorable buyout provisions.
“We wanted a truck program where qualified candidates could own a truck and be positioned to run it profitably,” Milligan said. “We’re setting them up to succeed through payment plans, maintenance programs and financial services that get them focused on their goals.”
This story appears in the April 21 print edition of Transport Topics.
Rising fuel costs, weakening demand for freight hauling and the subprime lending crisis are making it tougher for drivers and trucking companies to qualify for financing to buy equipment.
Lenders, in fact, are tightening credit standards in response to deteriorating trucker balance sheets, industry analysts said.
“Credit is only being extended to the best-quality, well-capitalized customers,” Andrew Casey, a senior analyst for Wachovia Capital Markets, said in a March 19 report to clients.
Casey said his checks with 12 truck dealers’ financing departments show delinquencies have risen “in the last 30 to 45 days, and default-repossession rates are expected to continue to rise as increased operating costs limit trucker ability to make payments.”
Lenders also no longer are issuing credit to borrowers with C-rated or D-rated credit and have increased down-payment requirements to 20% from 10%, said equipment wholesaler Tom Walther of Nationwide Equipment in Boise, Idaho.
“Everyone’s very cautious,” Wal-ther said. “No one’s buying big groups of trucks or trailers because no one wants to get caught when the music stops.”
One sign lenders are seeking to avoid getting caught: Jay Caron, president of Bee-Line Corp., a Springfield, Mass., equipment sales and rental firm, said he is getting more requests for inspections from banks and leasing companies concerned about their collateral’s condition.
“We’re getting very busy with one-off transactions and with mom-and-pop fleet operators,” Caron told Transport Topics.
Although he has not seen an increase in re-possessions, Caron said his inspections show that some fleet operators are forgoing maintenance, which is a sign of financial distress.
Another sign of a trucking credit crunch is an increase in activity for companies that provide freight bill-factoring services.
“The majority of our transactions are coming from traditional lenders that are unwilling or unable to extend credit,” said Eric Myers, director of business development for Transfac Capital in Salt Lake City.
“Some of that is due to companies not able to meet covenants,” he said, “while other turndowns have come from lenders unable to extend credit in the wake of real estate and other losses in their portfolio.”
In a typical factoring arrangement, a finance company advances a percentage of freight bills to the trucker in return for the right to collect the full amount of the invoice from the shipper.
The need for factoring is growing because many shippers are taking longer to pay their bills, said Al Chapman, general manager of FactorLane.com, a new service that matches trucking companies with finance companies.
Chapman said small and mid-sized companies take an average of 34.8 days to pay, while some large companies can take more than two months.
“Every year, the amount of time it takes companies to pay their invoices increases,” Chapman said. “There are many small companies wanting to do business with a large company but cannot afford to have capital tied up for months.”
Another sign of the times is the fact that drivers are asking Bobby Berkstresser, the owner of Lee-Hi Travel Plaza in Lexington, Va., for more time to pay fuel bills.
“Companies are not making money,” Berkstresser said.
Such difficulties with cash flow portend a more dire situation: More trucking companies are going out of business.
Jason Seidl, an equity research analyst with Credit Suisse in New York, said, “We expect truckload bankruptcies to continue to in-crease for the following reasons: one, truckload carriers are not able to recoup fuel surcharges for all miles driven, due to deadhead miles and idling, and, two, the majority of truckload carriers are smaller mom-and-pop type operators who do not have easy access to capital to stay afloat.”
Increased competition among lenders for creditworthy customers may have helped one fleet, Arrow Trucking Co. in Tulsa, Okla., negotiate terms for the purchase of trucks to replace its entire 1,400-truck fleet over the next five years.
Arrow President Doug Pielsticker said the deal with Daimler Truck Financial will “consolidate our tractor and trailer financing at very favorable terms.”
Meanwhile, independent truck owner-operators’ financial condition appears to be worsening.
Todd Amen, president of American Truck Business Services, a firm that provides accounting and bookkeeping services for about 40,000 owner-operators, said average net income for his clients declined in the fourth quarter of 2007 for the first time in more than four years.
The average earnings of ATBS clients in the last three months of 2007 was $12,850, compared with $13,500 in the fourth quarter of 2006.
“We expected that because of the spike in fuel costs and slow freight,” Amen said.
Another factor behind the drop in earnings is the fact that owner-operators are driving fewer miles.
Amen said the average ATBS client traveled 115,000 miles in 2007, compared with 140,000 miles in 2006.
Part of the reason for the drop-off in miles is the new federal hours-of-service rules, which limit the time drivers can spend on duty.
“The slow economy is part of it, as well,” Amen said. “Drivers might have to work more when times are slow, to increase revenue.”
The slump presents particular difficulty for drivers seeking to become independent. Many fi-nance companies have stopped doing business with first-time truck buyers, said Jason Rush, president of Cobalt Finance, a company that specializes in financing used trucks.
“It’s been very hard on first-time owner-operators,” Rush said. “As fuel increases and freight comes down, it’s not a good mix.”
Rush said loan delinquencies are currently running “higher than normal” but aren’t increasing, so he remains optimistic.
“It’s a viable business. We’re still committed to lending, but we’ve tightened up our standards. We want to focus on quality, not quantity.”
Because many banks have cut back on lending for the purchase of trucks, Amen of ATBS said he sees increased demand for trucking companies to offer lease-to-own programs for company drivers.
ATBS launched a leasing program about a year ago that combines financing with financial and management advice to keep drivers on track.
“We teach them how to manage money,” he said.
Early results of the program have been positive, Amen said, with drivers achieving better-than-average earnings and staying current on payments. Only 1.5% of ATBS clients in a $3 million loan portfolio are more than 30 days past due on truck payments in contrast with 8% to 10% past due among other subprime lenders, Amen said.
A similar effort at Fikes Truck Line in Hope, Ark., has been set up by Jack Milligan, director of special projects and president of Higher Roads, an organization that helps truck drivers with personal and business goals.
“Many drivers want to get out on their own,” Milligan said, “but too often, we see them get in over their heads, and quickly.”
In the program at Fikes, qualified drivers can lease a good used truck for no money down through Master Lease Inc., Henderson, Colo. The company helps to set up an escrow account for maintenance expenses and offers automatic payroll deductions for truck payments, plus bookkeeping and tax preparation assistance and favorable buyout provisions.
“We wanted a truck program where qualified candidates could own a truck and be positioned to run it profitably,” Milligan said. “We’re setting them up to succeed through payment plans, maintenance programs and financial services that get them focused on their goals.”
