Automakers Seek U.S. Assistance For Suppliers’ Factoring Firms

This story appears in the March 9 print edition of Transport Topics.

General Motors Co. and Chrysler  have asked the Treasury Department to set up an urgent insurance program to back capital for factoring companies that deal with suppliers and trucking companies serving the auto industry.

American Trucking Associations backed the program, saying that cash flow for hundreds of carriers has dried up.

Suppliers that provide components and transportation to auto-makers have seen their cash flow drop as factoring companies shy away from taking the risk of providing up-front cash in exchange for bills they fear may go unpaid.

“Suppliers face the additional challenge of many of their lenders being reluctant to include domestic OEM receivables in their borrowing base calculations because of concerns about OEM viability, impairing supplier liquidity when it is most needed,” GM said in its Feb. 13 proposal to the Treasury, which is running the automakers’ bailout.

GM said “the company proposes that the government create a credit insurance program, or a government sponsored factoring program, for OEM receivables.”

In a Feb. 20 letter to Treasury Secretary Timothy Geithner, ATA President Bill Graves said the federation “is supportive of the concept put forth by General Motors to create a government-sponsored factoring program.”

A government factoring program “would effectively guarantee payment of receivables to the hundreds of supply-chain partners, thus allowing those businesses more assured access to financing at this critical juncture,” Graves said.

GM estimated that the factoring program would cost about $4.5 billion through 2011 “for direct material and logistics suppliers.”

Chrysler did not put a price tag on its request.

Rodney Roberts, operations manager of Point Logistics LC, a Troy, Mich., for-hire carrier, said the problem with factoring companies began about six months ago.

“About 95% of our business is dealing in the auto industry,” Roberts told Transport Topics. “I believe the factoring companies are locked down pretty tight these days. The standards have gotten much tighter.”

Point Logistics operates 130 company-owned tractors and 60 trailers, Roberts said.

“We’ve still be able to work with factoring companies ourselves, but I’ve heard that other fleets have much tougher problems.”

“Cash flow is king in the trucking industry, especially during this recession,” Robert Farrell, executive director of ATA’s Automobile Carriers Conference, told TT. “If you cut cash flow, you’re in trouble, and that’s what has been happening to logistic suppliers to the auto business.”

In GM’s proposal, the government would “guarantee OEM receivables up to a certain limit, [and] the OEMs would select participating credit insurance providers, or supply chain financing providers, based on a competitive process, and suppliers would enroll in the program as they deem necessary, and pay insurance and processing fees.”

GM said the program must be in place by March, “as there will be significant working capital requirements to support the planned increase in the GM production schedule, following very low production levels in January and February.”

A spokesman for the Treasury Department did not return calls asking whether the Treasury had decided on the factoring proposals.

Representatives of several fleets who said they work in the auto industry — ranging from small fleets to major less-than-truckload and auto carriers —  declined comment.

Farrell said that the auto makers and their suppliers have been taking 45 to 60 days to pay their bills to businesses further down the chain, including the trucking industry.

“Trucking companies that needed cash immediately have always had the ability to take these receivables to businesses, including factoring companies, who would give them immediate cash for those notes,” Farrell said.

“But now, banks are not loaning to any companies that deal with auto receivables, because GM and Chrysler, along with their suppliers, might go bankrupt,” Farrell noted.

Kathleen Dasal, regional manager for Orange Commercial Credit, a factoring company based in Anaheim, Calif., said that her firm stopping doing business two years ago with clients serving the auto industry.

“There are carriers that this is mostly all they do, 80% of their business is with GM or Delphi and others in the auto industry, and they are desperate these days,” Dasal told TT. Those carriers “have had the rug pulled out from under them.”

“The practice is that factoring companies and other companies that purchase receivables can buy credit insurance to protect themselves in case of default,” Dasal said. “Now, because of the situation with GM and Chrysler on the verge of bankruptcy, that credit insurance has been pulled, and so factoring companies are refusing to buy the receivables of those carriers.”

Another major industry group also backed the measure.

“Motor & Equipment Manufacturers Association, our parent group, is actively involved in this issue and has been since last fall,” Tim Kraus, executive director of the Heavy Duty Manufacturers Association, told TT.

“We have been speaking with various agencies and offices in the federal government on a range of options regarding supplier liquidity, up to and including the guaranteeing of GM and Chrysler receivables, rapid payment requirements, loans from lenders that are facilitated by TARP funds and others,” Kraus said.