Nonbank Lending Rises in Late 2016; Truckers Struggle for Traditional Loans
This story appears in the Jan. 9 print edition of Transport Topics.
Nontraditional bank lending to trucking companies picked up moderately in the second half of 2016 as fleets sought to survive during a sluggish freight market, according to lenders with exposure in transportation financing.
Traditional bank loans typically offer the lowest interest rates, but as trucking companies struggled last year, banks became more stringent about lending.
“Banks are cash-flow lenders. They look to see that a trucking company has the positive cash flow annually to where it can make timely payments on the term loans: a concept called debt service coverage ratio,” said Rich Voreis, president of Marquette Transportation Finance.
When the freight industry hit a rough patch, some trucking companies were unable to generate enough cash to satisfy the bank requirements and turned to nontraditional lenders to get money to meet payrolls, purchase equipment, make acquisitions or other capital expenditures, he said.
Known for bridge lending, or transitional lending, these institutions give money to trucking companies based on accounts receivables or other financial assets, rather than cash flows, but they also charge higher fees or interest rates. Eventually, though, the trucking companies shift back to banks when times improve.
Freight factoring, asset-based lending and merchant cash advances are the three most common forms of these transitional loans. Factoring refers to a trucking company selling its invoices directly to the financial institution. The lender will advance a portion of the value of those invoices and assume the sole responsibility to collect on the invoices for a fee.
“The soft freight environment has the lingering effect of causing more distressed trucking companies, which in turn makes banks being more restrictive in lending,” Voreis said. “The reasons for the pickup in factoring right now is more on negative stress rather than positive growth or turnaround.”
Alternatively, asset-based lenders don’t purchase the invoices from trucking companies but rather offer interest-bearing loans based on invoices, property and equipment. These assets determine the borrowing base for the trucking company.
“Stricter bank regulations are certainly a factor, but the growth of e-commerce is a trend in play here,” said Sergio Rodriguera Jr., chief strategy officer at The Credit Junction, an asset-based lender.
As e-commerce has exploded, companies have formed that are exclusively online, but these businesses have had trouble securing traditional bank loans, he explained.
“For whatever reason, some commercial lenders are not entirely comfortable with e-commerce companies, whereas for me, I can get data points on your inventory in real time with our technology and that will give me an better insight into your business to manage my risk.”
Merchant cash advances are another type of financing, although those are traditionally reserved for smaller trucking companies and also carry high interest rates. In general, the concept is that the lender advances a lump-sum payment in exchange for a percentage of future sales or invoices. But some of these lenders have received a negative reputation for their practices, similar to payday lenders.
“They will lend money, but they actually take control of credit cards, payments and checking accounts and get immediately paid by the money coming in. They also charge significantly more [in fees] for that control,” Voreis said.
But Jim Salters, vice president at Enova International Inc., which offers cash advances, said the public perception is unfair and that bad actors ruin the reputation of good lenders. These bad actors prey on owners in trouble and make money on a last-ditch effort to save their trucking companies, he said, but better lenders offer a high-tech solution to make carefully structured loans based on real-time data and reasonable assumptions.
“We won’t take on any client like some of the less reputable lenders out there. We are looking to structure fair deals that benefit clients with strong applications,” Salters said.
Like factoring and asset-based lending, the merchant cash advance market improved in the second half of 2016, he said. But unlike the other lenders, Salters credited higher consumer confidence for the moderate uptick in lending activity.
“I would say the turning point came after the election of the new president,” he said. “Trucking companies that are better applicants are starting to ask for money in anticipation of a strong year in 2017.”
