(This is a guest blog post by Steve Hausman (right), president and CEO of Triumph Business Capital, DAT's exclusive provider of factoring services for carriers and brokers. He is a fourth-generation trucker, has an MBA from the University of Michigan, and has more than 30 years experience in commercial finance. He’s an IFA Certified Account Executive in Factoring, pitmaster on the Triumph barbecue team, and serves on the advisory board of the Prison Entrepreneurship Program.)
During the first part of this year we’ve seen more shippers extend their payment terms than at any time since the financial crisis of 2008. What does that mean for freight brokers? You need to have a plan to secure the working capital you need throughout an ever-changing business cycle.
The golden rule
The “golden rule” of business financing is to match the term of the obligation to the asset being financed. You don’t finance a car for 30 years and you probably didn’t mortgage your home for 36 months. Carriers deal with this all the time: matching equipment finance terms to optimal replacement cycles, which are impacted by mileage, utilization and application. Transportation intermediaries appear to have it easier: matching accounts receivable to payables and operating expenses. But, maybe not. Like backing in a shorter trailer, it’s easier to see what you’re doing but it can get away from you that much more quickly.
The golden rule of working capital financing is that it should adapt dynamically to your volume, both up and down.
Let’s review four accounts receivable (A/R) financing options, from most to least expensive, highlighting a few pros and cons.
1. Online (cash flow) loans - You’ve seen the commercials: apply online and get funded in 24 hours or less. Although pricing has come down since this product’s peak in 2014, rates are still in the 30% to 45% APR range. Structures vary between lenders, but generally involve short (90 to 180 day) term loan facilities with frequent (often daily) ACH withdrawals from your business bank account. In Triumph's carrier factoring business, we see on average 3 to 5 business closings per week due to inability to service the daily cash draw. Speed kills.
2. Factoring - While there are dozens of factoring options for carriers, there are relatively few for freight brokers. The issue is carrier payables. Most factoring companies insist upon paying carriers on the broker’s behalf while some are content with monitoring the outstanding payables. In either case, it’s generally difficult for a freight broker to factor some but not all of their accounts and, as a result, servicing can be difficult for those freight brokers built on agency models. Pricing tends to be significantly less than the factoring rates charged to carriers. In our experience, freight broker factoring is “feast or famine.” It works wonderfully in some situations and poorly in others.
3. Asset based lending - This is a style of commercial finance that looks more to the collateral (accounts receivable) than traditional bank loans. As a result, slightly higher pricing and servicing protocols may be a worthwhile trade-off for businesses seeking flexibility and availability. Most asset based loans, or ABL’s, are styled as revolving credit facilities in which the borrower presents periodic collateral reports that determine the amount of loan availability—from which borrower can simply request draws to fund operating capital. Loan documents will specify loan eligibility rules and may or may not limit available funding based on outstanding carrier payables or aging.
4. Bank loans - In today’s market, regional banks have become nearly as aggressive as commercial lenders in regards to structure and terms, with lower pricing and servicing fees. As the more tenured asset-based carriers can confirm, banks may have a different risk tolerance and tend to leave the party early when the economy gets choppy. So be mindful that relationships matter, particularly in cyclical industries like trucking. Bank underwriting is based primarily on years in business, balance sheet leverage, cash flow coverage of fixed charges and debt, and the quality of the borrower’s financial reporting. For those brokers who qualify, don’t overlook the golden rule and the benefits of matching term and structure to your working capital.
In my view, most freight brokers do a better job of managing their A/R than their A/P. As one TIA member recently told Triumph: “That’s where the money is.” Fair enough. But the complexity of projecting working capital needs is generally all about carrier payables. As you already know, most of the complicating factors are interrelated:
- Payment terms
- Documentation requirements
- Fuel advances
- Payment processing costs
- Industry and regional norms
- Impact upon credit rating
- Cost of paper checks
- Opportunity cost of attracting and retaining the right carriers
The mistake that we at Triumph Business Capital see most often is freight brokers establishing accounts payable policy based on cash needs vs. business strategy. The solution may be accounts payable financing or “supply chain finance.” Supply chain finance, also known as vendor finance or reverse factoring, is a set of working capital solutions that address your cash flow requirements while allowing your carriers to select payment terms of their choosing.
Lastly, the cost of accounts payable processing is one of the least measured, and least understood, overhead expenses. For example, do you know how much it really costs you to write and mail a check? We see payment processing as the most immediate opportunity to use applied technology for operating expense control.
There are few things that business people take more personally than their cash flow. So I'm going to share two specific recommendations:
1. Shop without prejudice - Working capital financing options have never been more price competitive, and that's probably not going to change until the Federal Reserve takes monetary policy in a different and more expensive direction. Be smart. Invest in relationships that will stand by you through industry cycles.
2. View carrier payments as business strategy, not cash flow necessity - If truck capacity is critical to your business, why not tailor your A/P practices accordingly? If you can model how you want to compete as a transportation company, there are working capital solutions that can get you there. You just need to arrange and negotiate a working capital settlement, deal or plan.
For more information, visit Loadfunding.com or call Triumph Business Capital at 866-638-8700.