Take it from the bank

It doesn’t take an MBA to understand why lenders are cautious toward the trucking industry. Jerold Buchan and thousands of other fleet owners can explain through first-hand experience.
“We are very cash strapped. There is no profit margin in trucking anymore. It’s killing us,” says Buchan, president of Buchan Trucking, a 19-truck carrier in East Troy, Wis. “We’ve been in business since 1978, and we’re barely making it right now. Many companies are dropping by the wayside. There is no room for error.”

Responding to federal regulations, internal examiners and economic conditions, banks have tightened credit in the trucking industry. Carriers have also tightened their spending, as reflected by the sharp decline in new Class 8 truck sales this year.

“We’ve tightened up,” says Karen Weatherholt, co-owner of H&W Trucking, a 49-truck fleet in Ona, W. Va. “We have not made any new purchases for the past two years and have not ordered any new trucks. We’re not going to until the economic news improves.”

Like Weatherholt, you may not be financing new equipment, but you still need a good relationship with your lenders. Perhaps you need working capital or a little extra time to make your payment. Or you might need to restructure your payment schedule to adjust to seasonality. Although banks have tightened their credit, they are still willing to negotiate rather than put you out of business. After all, their best chance of getting paid is to keep you going – assuming you have a solid recovery plan.

Negotiating a new deal
If you anticipate cash problems that might delay a note payment, let the lender know in advance. When you call, tell them your problem and when you will pay, advises Ron Ricks, vice president of trucking at CIT Equipment Financing. If you’re not prepared with a payment plan when you call, you might as well round up your trucks and park them, Ricks says.

This past winter, Weatherholt thought H&W Trucking might not have enough cash to make its scheduled equipment payments. She called her lenders and explained the situation. All but one allowed her to skip principal payments and pay interest during the winter months. The lenders tacked the principal payments to the end of the notes without damaging her credit rating.
“We make sure to call them before they call us,” Weatherholt says.

If you must delay a payment, however, don’t expect all banks to accommodate you readily. Bank mergers and consolidations may complicate negotiations. You may have to tread through a bureaucracy of white collars before getting approval.

“I feel that when you deal with local entities you end up dealing with a bank two states away,” says Barbara Joy, president of Astro Enterprises, a 120-truck carrier in Anderson, Ind. “And with major banks, even area people don’t have the finalization anymore.”
Steve Parker, assistant vice president of commercial loans at Transportation Alliance Bank in Ogden, Utah, lends mostly to owner-operators and small fleets – those faced with the toughest cash problems.

“I’m doing everything I can do to prop up our customers,” Parker says. “We will extend payments if they show a willingness to repay.”

That was certainly the experience of San Antonio, Texas-based Earth Transport. “We had long, detailed discussions with our banker,” says Justin Poss, vice president of the 90-truck carrier. “We let him know what our plans are, and that when it picked back up we would be very busy.” Earth Transport had almost exhausted its credit line, which was backed by the company’s accounts receivables as collateral, when three to four months of rain halted work. Confident in the management of the company, the bank granted the carrier more time to repay, Poss says.

Banks are required by law to report their customers’ payment history, so simply delaying or skipping payments damages your overall credit rating. Your credit with a particular lender may stay unharmed, however, by negotiating a payment plan and sticking to it, Ricks says.

Borrowing a cushion
For some carriers, making debt payments may not be the problem. Instead, sudden growth, seasonal downturns or especially large disbursements may have starved their working capital, making it difficult to cover operating expenses like fuel or payroll. In those cases, borrowing on a line of credit may help.

“[Growth] is a two-edged sword,” Buchan says. “You get hurt when you do expand. From the beginning you’re falling behind.” Currently, Buchan is using his credit line to sustain him through a rough period he expects to last 60 days. He expects freight to be strong through the next month, but cash flow will not improve for at least 30 days because of slow-paying customers.

“I don’t know if I’ll have enough money for the busy season,” Buchan says. The downside of using a credit line, Buchan notes, is that it’s too easy to become dependent on the increased cash flow. For periods of big cash outflows – such as annual licensing or for seasonally slow months – a credit line is invaluable. But used too often as a lifeline to cover day-to-day operating expenses, borrowing against a credit line just digs the hole deeper.

Another source of quick relief is factoring freight bills. Compared to the monthly interest rate on a credit line, a factor fee is usually higher, notes Jim Botsford, vice president of business development for Capital Associates. Overall, factoring may actually be less expensive, however, when you add up the transaction fees that some banks charge, he says.

Factor firms also may offer services that banks do not, such as free credit checks on a client’s new customers and billing services to reduce bad debt.

The cost of factoring depends on the reliability of your payment stream and on which type of factoring you choose. If you factor without recourse, the factor firm buys your accounts receivable outright and takes over the risk of collecting those payments. For a smaller fee, a factor firm assumes less risk and returns unpaid invoices to you after a period of time, such as 60 days past due. This option is known as factoring with recourse.

Factoring your receivables generally is not as convenient as drawing on a pre-approved credit line during a cash shortage. Most factor firms want you to factor for at least 6 months, Botsford says. But depending on the situation – especially if you can’t qualify for a bank line – factoring may be the best solution for obtaining cash.

“If you’re starting out, you can’t do anything for 38 days,” Botsford says. “With factoring, you can get operating costs up front from the invoice. Without it, you’re dead.”

Living with tighter credit
One of the biggest changes during the past couple of years has been the evaporation of capital to fund new equipment. During the late 1990s, financing was easy, so many trucking companies and owner-operators chose to buy new trucks rather than used equipment. In response to the resulting glut, lenders are advancing less money on equipment, shortening terms and increasing minimum down payments. Lenders are also lowering lease residuals, which increases the monthly payment, Ricks says.

“Trucks are taking 20 percent hits in two months in book value,” Parker says. “We think we are in a good position and then in two weeks we’ll find out we over advanced.” Higher down payments hurt owner-operators and small fleets the most, he says. These groups often don’t have enough cash to make equipment purchases that require significant down payments. Even without a down payment, it costs thousands to put a new truck into service with licensing, insurance and other upfront costs.

Tighter equipment lending can actually be a mixed blessing, however. Anxious to move used trucks from their lot, dealers are open to price negotiations. Parker suggests asking your lender for a loan value on a piece of equipment before negotiating a price with the dealer.
“I’ve advised customers that it is a buyers market,” Parker says. “You tell [the dealer] how much you will pay for a truck. He’s going to hit you high, but call me first and I’ll tell you what the loan value is.”

With truck sales dropping and used truck inventories climbing, finance companies affiliated with truck manufacturers are offering competitive rates to get trucks moving out of inventory. For many fleets, therefore, obtaining financing for new trucks is the least of their worries. Poss, for example, says a finance company recently offered him the prime interest rate on his order of 10 trucks. The real difficulty, therefore, is finding a lender that will help sustain you through periods of cash shortages. The window of opportunity to work with a lender is before signing a note.

Sticking to a plan
If you anticipate cash flow problems due to the seasonal nature of your business, you can set up a payment schedule with lower payments during periods of lower cash outflows. You can also customize a lease program that fits your cash budget.

Recognize, however, that lenders aren’t infinitely flexible, and your lender probably will demand some concessions. Your loan officer operates under stringent lending guidelines, and bank examiners rate him by how well his loans are performing. If you want mercy, be prepared to show your lender why the leniency will only be temporary. Your banker may insist on new restrictions, called loan covenants, based on certain financial ratios (see page 58). And if your lender isn’t asking for regular financial statements now, he certainly will do so in the future. If you want your lender to work with you, you had better be willing to work with him.

Chapter 14 of the Small Carrier University manual How to Use Financial Statements discusses factors that bankers evaluate on your financial statements. You can view the manual online at www.smallcarrieruniversity.com”>www.smallcarrieruniversity.com.

Promising performance

John Pope has noticed that the calculation of his interest rates depend more on certain ratios and factors than before. Pope, president of 270-truck Cargo Transporters in Claremont, N.C., says that his interest rates have stayed the same, but he feels more pressed to maintain his balance sheet figures.

Bankers use several key ratios in their analysis. Many loans include these ratios as part of loan covenants, which are agreements you sign with the bank pledging that you will keep your financial health and performance within a certain range. Three common clauses often found in covenants are tangible net worth, debt to net worth and cash flow in relation to debt service. By monitoring these ratios throughout the year in your financials, you can improve your negotiating power in getting better interest rates.

Tangible net worth. Your tangible net worth is your net worth at the time you negotiated the loan. The lender doesn’t want operating losses to endanger the core financial health of the company. Nor does the bank want management to withdraw salaries, dividends or loans that will weaken the company.

Debt-to-worth ratio. Bankers get nervous when your total debt divided by your net worth gets larger than four to one.

Cash flow coverage ratio. This ratio shows whether your operations are producing enough cash to service the annual debt. To determine the ratio, generally you start with net income, add back depreciation and interest and compare the result to your annual debt payments. Bankers like to see a ratio of 1.25 to 1 or better.

By monitoring loan covenants yourself, you can proactively resolve any discrepancies before your lender spots a violation. You should set up your own spreadsheets to track ratios as often as possible because your banker may only review ratios annually. If you can catch deterioration early, you can work with an accountant about how you can get back in compliance before the end of the year.

If you have a good, open relationship with your lender, loan covenants may become more than just enforcement tools for the lender. By exceeding performance goals significantly, you may be able to negotiate better interest rates, for example. But even if superior performance doesn’t win you a better deal, think of loan covenants as a tool to help you improve your business. That’s how your lender sees it.