Trucking Companies Face Growing Cash Crunch as Shippers Struggle to Survive Downturn
By Susan L. Hodges, Special to Transport Topics
This story appears in the Sept. 15 print edition of Transport Topics.
Astronomic fuel prices are only part of the economic drag on trucking these days. Add the growing length of time on accounts receivables, more customer bankruptcies and the tightening of credit by suppliers and lenders, and it’s easy to see how carriers’ cash flow has ebbed.
Executives at trucking firms with cash reserves or other accessible capital said they are drawing more from these assets to subsidize daily operations. Other carriers, however, are scrambling to stay on the road.
“Motor carriers have always had huge accounts receivable,” Lana Batts, a managing partner at Transport Capital Partners, told Transport Topics. “You haul the freight and hope you get paid later.”
Batts and other industry sources said daily sales out, DSO, now averages between 35 and 45 days. Compare that with the seven days shippers generally had under Interstate Commerce Commission tariffs to pay for freight until the ICC was abolished in 1995, and the result is a wait time that’s now more than four times longer than it was 13 years ago. Yet fuel suppliers still require quick payment, some in a week or less. The problem is worst, Batts said, among carriers that pay for fuel in advance or daily via fuel cards given to their drivers.
“So you buy fuel on Tuesday, have to pay for it by Wednesday, and you don’t get paid until 45 days later,” Batts said, encapsulating the problem.
An increase from an average of 30 to 45 days on accounts receivable drains more than $40,000 from a carrier’s cash flow for every $1 million in revenue, according to industry estimates.
This drain has contributed to 1,905 trucking companies’ going out of business during the first half of this year, said stock analyst Donald Broughton of Avondale Partners.
But the problem has even deeper roots. Greg Owen, president of Ability Tri-Modal Transportation of Long Beach, Calif., said customer bankruptcies are costing his firm hundreds of thousands of dollars.
Owen talked about two shippers, one that has owed Tri-Modal $200,000 for two years and another that declared bankruptcy still owing his company more than $200,000. He said one bankrupt shipper filed suit against his company for $283,000 in freight charges it already had paid during the months leading up to its bankruptcy.
“They claimed these payments were preferential,” said Owen. “We paid them $8,000 to go away.”
Preferential payments are those made by a firm up to 90 days before it files for bankruptcy. Many states allow debtors to sue creditors to have those payments returned. Under California law, Ability
Tri-Modal was not required to return the money. But under legal advisement, it paid a fraction of the amount to satisfy its debtor.
Said Owen: “Under bankruptcy laws, you’re killed for the profit you get.”
Bob Ramorino, president of RoadStar Trucking in Hayward, Calif., and the current president of the California Trucking Association, told TT last month that he was concerned about the potential bankruptcy of a RoadStar customer.
But he talked about another nonpayment technique that has been used against his firm as well: back-charging.
“We’ll have a customer call from out of state who has a huge product recall, and everything is last-minute,” he said. “You have to get the product out of 50 locations and ship it back to the customer for re-working, and then they don’t pay.”
Ramorino said when RoadStar pursued some shippers that did not pay, the shippers claimed damage to the goods caused by RoadStar had exceeded the cost of freight.
“They find some way to charge you back for damage or shortages or late delivery,” he said, “and then say they don’t owe anything.”
RoadStar recently filed suit against several shippers that owed the carrier money, and the judge ruled in RoadStar’s favor.
“But getting the award is only the first step,” he said. A motor carrier “can easily spend $10,000 on attorney’s fees” when the money to be recovered may be only $2,500.
RoadStar is now applying more diligence to its qualification of shippers and shying away from one-shot deals. The company has also notified certain slow-paying customers that from now on, shipments will be collect on delivery.
Bruce Jones, president of KSM Transport Advisors, Indianapolis, said he urges carriers to implement more aggressive collections practices. By hiring collection agencies to help recover money from customers beyond 30 days out, carriers can show problem shippers that delinquencies will not be tolerated, he said.
Jones added that carriers can speed up their billing processes by using document-scanning systems such as those available from TripPak or Prophesy that allow drivers to file proofs of delivery anytime from their cabs or a truck stop.
Another drain on carriers’ capital is the practice of charging shippers the “shortest” miles to a destination. Rather than charging for actual miles driven, most carriers still base their charges on published Household Goods miles, a traditional industry standard.
But Batts said those estimates can be off by as much as 8%. “We’d be off this hook if we’d start using actual miles,” she said.
More truckload carriers are starting to demand round-trip mileage for freight hauling, she added, but those that do not “are stuck paying for the miles they drive empty.”
Craig Fiander, a vice president at ALK Technologies, Princeton, N.J., said the push for reality-based mileage billing is a major issue among his company’s truckload clients.
He also said Batts’ estimate of an 8% variation is conservative in some cases.
“If you’re hauling hazmat up the Northeast corridor, there could be as much as an 18% difference between shortest distance and hazmat,” he said.
To remedy mileage discrepancies, Fiander said that ALK is encouraging motor carriers and shippers to adopt “practical miles” as a best practice in standard truckload contracts. Practical miles are calculated from one ZIP code to another and thus provide a more accurate estimate.
He also suggests carriers and shippers consider using either street-level miles, such as those measured by navigation systems, or 53-foot trailer routing, because not all routes allow trailers that long.
Fuel surcharges also remain a sensitive subject with carriers. Several industry analysts said although surcharges added 40.5% to freight rates as of mid-August, many trucking firms are still recovering only 80% of their fuel costs. Many carriers update the surcharge once a week, based on the national average diesel fuel price issued by one of several sources. However, midweek price spikes over the past several months have stung truckers.
Batts explained, “If the price of fuel goes up on Tuesday, [and] I can’t change my surcharge until the following Monday, I’m always behind.” So much so that even when all of a carrier’s shippers pay 100% of their surcharge, Batts said the carrier can still be short “about 20%.”
To cope with cash shortages, carriers are increasingly turning to factoring. Factoring is the sale of part or all of a company’s accounts receivable in exchange for quick cash.
DiAne Reed, senior vice president at Marquette Transportation Finance, Bloomington, Minn., said her company has seen a 20% to 25% uptick in new factoring business this year.
Reed pointed to bank failures and solvency crises as the main reason more trucking firms are turning to factoring.
“Banks are traditional players in the trucking market, but a downturn in trucking is usually the first indicator of an economic downturn,” she said. “We’re seeing a lot of banks exit these loans out of their portfolios.”
The consequence: When banks stop lending to trucking firms, carriers that have rolled over operating loans from banks as a way to preserve cash flow must find other funding sources such as factoring.
Factoring fees typically range from 5% to 10% and are based on a carrier’s creditworthiness and the credit ratings of its customers. Whether factoring is a plus or a minus to truckers depends on whom you ask.
Stephen Russell, chief executive officer of Celadon Group, a truckload carrier based in Indianapolis, sees it as abusive when offered by freight brokers to small firms.
“No bank will lend to a 100-vehicle fleet without a personal guarantee from the owner,” said Russell, “so you resort to brokers who put together shippers and carriers, and they may offer a fast-pay solution.”
But Russell finds irony in the fact that, in exchange for paying a carrier on time, certain brokers take a discount of 1.5% or more.
“Instead of getting paid $1.50 a mile, now you’re looking at less,” he said. “But you’re getting paid quickly, so you tolerate the difference.”
Paul Will, Celadon’s chief financial officer and chairman of American Trucking Associations’ National Accounting & Finance Council, said the failures of so many motor carriers offers some hope for the remaining companies.
He said he foresees a turnaround as early as next year — based not on increased demand but on capacity shrinkage.
“We’re seeing a little of this now,” he said, citing one large shipper that, because of the failure of Jevic Transportation, was temporarily left without a hauler.
“Carriers are trimming capacity because they can’t afford to run trucks all over the country with the current price of fuel, and I think that’s very healthy,” Will said. Shippers will soon realize they’re going to have trouble moving their product, he forecast, adding, “If every carrier would examine the strategic value of its shippers and how their freight complements or detracts from [the carrier’s] business, we could help ourselves and help speed the turnaround.”
RoadStar’s Ramorino agreed the current down cycle could end reasonably soon, but “it’s going to require discipline from a lot more carriers.”
