Credit risk

user-gravatar Headshot

When Jones Motor Co. Inc. takes on a new broker or shipper, the company checks credit. Period. Joanna Sheffer, credit and collections manager for the 100-year-old carrier, believes regular credit checks are essential, whether a trucking company is small or large like Jones, which operates more than 1,000 trucks.

“It’s what keeps trucking companies in business,” Sheffer says.

Even many carriers that have traditionally hauled for a few core shippers are finding themselves doing business with new customers – and not just in backhaul situations. During the recent economic downturn, many shippers failed, and others are consolidating their transportation services in fewer carriers. Meanwhile, many carriers are trying to diversify their customer bases to limit the risk of downturns in specific industries. But failing to keep tabs on potential – and existing – customers represents a different kind of risk. In a soft economy, creditworthiness can change quickly.

Credit checking services can help carriers reduce incidents of bad debt, avoid scams and steer clear of loads that don’t pay. And through technology, these services are becoming easier to use and more informative than ever.

Risky business
Avoiding bad accounts can mean the difference between a slim profit margin and no profit at all. Carriers that check credit do better than those that don’t, says Greg Conklin, customer relations and sales manager for CompuNet Credit Services Inc., which is dedicated to the transportation industry. “The year 2000 was one of the roughest years in trucking,” Conklin says. “We had only 12 carriers [that use CompuNet] that went out of business during that time.”

CompuNet and TransCredit Corp., another trucking-specific credit service, say they have added customers and business during the recent economic downturn for two reasons. Companies are trying to avoid losses wherever they can. And more carriers rely on new business to make up for the loads they lost when the market soured.

“When times are good, companies move a lot of freight from shippers they already have credit on,” says Winston Aston, president of TransCredit. “When times are bad, they’re out looking for new customers and picking up freight from brokers they’ve never done business with.”

Partner Insights
Information to advance your business from industry suppliers

Conklin says CompuNet added nearly 25 percent to its customer base “because when things are a little tougher, it’s all the more reason to watch their pennies.”

And it may sound like pennies. Bad debt accounts for 2 percent of receivables on average, Conklin says. But that’s hardly insignificant in a tight-margin business. Trucking companies that use credit reports to evaluate whether they take a load average as little as 0.25 percent, Conklin claims.

Charlie Searcy, credit manager for Florida-based brokerage and carrier Fulmer Brothers, Inc., says credit checks keep him from making bad decisions every time he orders one. “If it got me out of trouble, I made the right decision,” he says. “My (sales) guys think I’m on the other side sometimes. But I don’t want any losses.”

Different strategies, different data
Getting a credit report is easy. Using it to improve your business is more difficult. It’s important to have a policy regarding credit reports, especially if more than one person in your company can make a decision on extending credit.

Bill Balduino, leader of risk management practices for 160-year-old industry giant D&B, says credit officers often use different strategies to evaluate potential business and can come up with different standards. “If you asked 30 different credit professionals their opinion, you’d get 30 different answers,” he says.

But keeping tight control over decisions is no guarantee of success. You need a solid strategy to help keep you out of trouble. Balduino recommends drafting a system that reflects your business strategy.

If your principal concern is doing business with stable customers, you might focus on the number of years the shipper or broker has been in business. If cash flow is a major concern, you might accept business only from brokers that pay in 30 days. Or if your equipment utilization were low or you needed backhaul freight, you might be willing to accept higher-risk shipments.

Those strategies vary in urgency from carrier to carrier, but cash flow clearly stands out as generally the most compelling. “Every fleet, no matter what their size, is interested in turnaround,” Conklin says. “It doesn’t matter if you’re Swift or Bob’s Trucking. It still costs money.”

Both CompuNet and TransCredit, as well as traditional services, can provide details on a shipper’s or broker’s pay habits. The companies glean this information from their customer database. The industry average turnaround is 47 days. Turnaround time can also indicate problems with a shipper. While a shipper may be paying your business on time, it may be falling behind elsewhere. It’s a safe bet that a shipper failing to pay on time to some carriers will probably fall behind with others.

A credit report can tell you many things about a customer, from speed of pay to liens and bankruptcy to corporate history. You have to prioritize which is important to your company, says Aston. “First thing, identify any collection activity and figure out why it’s there,” he says. Some carriers choose to disqualify a prospective customer if it has any collection activity. “Then look at their payment trend. How are they paying? In 30, 35 or 45 days? Based on the amount of dollars the load is, you may be able to make a decision right there.”

Simplifying matters
Some carriers rely on a scoring system. TransCredit, for example, rates shippers and brokers on a variety of information, and then assigns a two-digit risk assessment score of 0 to 99, with 99 being the lowest risk. The scores, which are available through various online load boards and organizations like the National Association of Small Trucking Companies, can cut time and eliminate some of the guesswork. For instance, a fleet’s policy may forbid accepting loads from a shipper with a score of less than 50.

But the score has limits. If a shipper has only been in business for a short period, it may have a low score. The company may be perfectly viable and may pay faster than shippers with a much higher rating. Likewise, a company’s score may not reveal a company’s long-term outlook. If it’s in a manufacturing segment that’s on the decline or if its facing potential legal or financial hurdles, the score may not completely reflect the company’s willingness or ability to pay.

In setting strategies, carriers often consider payment patterns, or how fast a shipper will pay after delivery. For carriers struggling with cash flow, knowing this information is essential.

CompuNet offers a listing, called the Gold Book of Transportation Brokers, of companies that pay in less than 30 days. And D&B offers a payment meter on its business reports that indicates how fast shippers pay. Pat McParland, D&B’s leader of core products, says the company bases its meter score on trucking-specific payment experiences and has more than 48 million payment records to pull from.

D&B has developed a software tool that codifies that decision making process. Called the Global DecisionMaker, the software will actually suggest a course of action. After defining a credit strategy, carriers plug in parameters of a credit report and other payment or trade information, and the Web-based software will create a report advising whether to extend credit and how much.

Credit scores, the Gold Book and D&B’s software are designed to cut the time it takes to make a decision, but for longer-term clients or for greater risks, carriers should look deeper into a company’s credit. One important risk factor, for example, is a shipper’s years in business. “If a broker is in business for just 90 days, am I going to start running $20,000 to $30,000 a month with them?” Aston asks.

Generally, the more risk a carrier has in a load, the more likely they will be to check credit. Peggy Tessler, supervisor in accounts receivable for Packard Transport, a 400-truck fleet in Channahon, Ill., says her company checks every shipper’s credit unless the load is a rush and pays less than $500. “We do business with so many brokers, that you have to check,” Tessler says.

That rule of thumb keeps Packard out of many bad debt situations. Any shipper wishing to do more than a single load with Packard still must undergo an extensive credit check. When the company hits a slow freight period, it can request credit reports daily, Tessler says.

At Jones Motor Co., instances of bad debt are down because of credit checking, Sheffer says. The company, which uses a network of agents to find shippers, relies heavily on the credit information it gets to lower risk. “As we add agents, we add new shippers,” she says. “And we credit check every one.”

Sheffer says Jones Motor looks at each shipper on a case-by-case basis and calls credit references on the report as well as other carriers to verify the shipper’s credit information. The carrier also question its agents about the shipper relationship before going ahead with a load. “As we work with agents, if they’ve had that shipper as a customer, and if they’ve had good experience with them, we’ll give the shipper a shot,” Sheffer says.

Old friends
Credit experts also say it’s important to check frequently on those customers where you have the biggest reach – even if that client has a good track record with your business. “Exception freight won’t hurt you as much as clients that you do regular business with,” Aston says. A loss of $1,000 in revenue is nothing compared to a loss of $60,000 accumulated from one long-term shipper who’s gone out of business. Aston recommends you check your regular business partners at least once a year. Some carriers check as often as 90 days to ensure they don’t miss early warning signs.

D&B offers an alert system for customers that can track a company that may be experiencing difficulties. The early warning system lets you know if it looks like someone is going to go bankrupt or has a lien placed against them or if their ratings begin to falter.

“The profile of companies that are filing for bankruptcies has changed,” says D&B’s Balduino. “A lot of old firms that overextended in the 1990s are going under. Monitoring is critical.”

So is benchmarking. Credit report companies can offer a lot of information about various segments. If produce companies are falling behind, for instance, that kind of benchmarking information can help a carrier decide whether to add trucks or forego business.

Credit checking also helps fleets avoid scams and fly-by-the-night brokerages, which can zing a company for thousands of dollars before they realize it. Conklin says CompuNet finds scams that target carriers frequently.

“Unfortunately we see a lot of that activity. When we’re putting a credit report in our system the first time, we spend a lot of time on the research side of it,” he says. “Very recently we’ve had several glaring examples, but we’ve managed to head them off each time.” The research the companies do also help identify unsuccessful brokers that have set up a new business under a new name, Conklin says.

And don’t forget the most important creditor of all: your own company. By tracking days sales outstanding, or DSO, for each customer – which you should be doing for cash flow reasons anyway – you can quickly determine whether customers are beginning to slip. If a credit report shows a shipper or broker is slipping with other customers but it isn’t slipping with you, you obviously will want to respond carefully and cautiously. (For more on tracking DSO, see “Do you DSO?”, Finances, September 2001.)

Can’t have too much
The variety of services offered by credit report companies can be large for a small carrier and helpful for larger ones. Keep in mind, too, the checking credit costs money, but for an average of $7 to $20 a report, the expense is probably well worth the effort. So is checking multiple credit services. A transportation-specific service may not give you enough information on a shipper that is a manufacturer, because they tend to check transportation transactions, where a D&B or Equifax will check other credit risk areas.

That’s why Packard Transport uses D&B in addition to TransCredit for its credit checking. “If a customer pays trade poorly, they won’t pay trucking well,” Tessler says.

Or as TransCredit’s Aston puts it, “You can’t have too many credit services.”

The four Cs of credit
For spot freight, it may be enough that a broker or shipper has a strong track record of paying on time. But long-term, higher-volume customers call for more analysis – even if you have done business with them for years. D&B suggests fleets apply the “Four C’s of Credit” for analysis: character, capacity, capital and condition of the times.

Character refers to a business’ history and the experience of its management team. Research a company’s history, any previous litigation and bankruptcy issues, and get to know its business before devoting your fleet to it.

Capacity refers more to a company’s size. While small shippers and brokers may make good partners, larger companies have enough staff to compartmentalize work. A manager who has to wear several different hats may not be focused on making sure your payments are on time.

Capital is a bigger issue with manufacturers. Can the shipper meet its financial obligations to its core business functions on time? D&B says some customers unable to pay may be risky, but may also be able to work out payments over time. That’s a lot better than a customer who’s unwilling to pay.

Conditions in the business segments your shippers are in the company is in. A steel manufacturer who has been a low credit risk in past may be unable to meet its commitments because of changes in the economy. Checking the credit of a customer will help prevent loss, but understanding the economic conditions of your base, however, will give a clearer picture of risk.


CompuNet Credit Services
TransCredit Corp.