Trucking companies are on an incredible roll, raising a question for their lenders: Do they keep on truckin’, or slow down to avoid a big wreck in transportation finance?
Thanks to the strong economy and other factors, U.S. truckers are charging their most expensive prices in at least five years. The average price in July to ship goods was 38.6% higher than in December 2003, when a federal government index was created. That was 12% higher than a year ago.
Trucking companies’ expenses have climbed along with freight-hauling rates, but the end result is still higher revenue. Haulers are using more of their credit lines or factoring agreements to meet the increased demand for their services, said DiAne Reed, director of national sales at Marquette Transportation Finance, a unit of the $20.3 billion-asset UMB Bank in Kansas City, Mo.
“The numbers are going off the charts,” Reed said. “Everyone is buying newer trucks and new equipment and paying drivers more.”
One big area of growth is invoice factoring for transportation firms.
In factoring arrangements, banks purchase a trucking company’s accounts receivable, which gives truckers the ability to meet immediate cash-flow needs. As truckers’ invoices have gotten larger, so has the factoring business, said Heath Holdbrooks, transportation services division president at Crestmark Bank.
“The larger the invoice, the better the spread for us,” Holdbrooks said. “We want to see freight prices increase.”
The opportunity has even caught the eye of commercial banks that historically were not interested in the business, Holdbrooks said.
“In the early 1990s, banks didn’t want to have anything to do with factoring business to trucks,” he said. “But it’s becoming more and more common now.”
Two recent M&A deals demonstrate its rising importance. Crestmark was acquired on Aug. 1 by the $4.2 billion-asset Meta Financial Group in Sioux Falls, S.D. And the $3.7 billion-asset Triumph Bancorp in Dallas this year agreed to
The trucking business is a $750 billion market in the U.S., with more than 750,000 companies, said Triumph CEO Aaron Graft. Most of these companies operate fewer than 20 trucks, and it is companies of that size that Triumph is targeting.
“We provide these customers with working capital, insurance, fuel discount and equipment finance opportunities,” Graft said.
Heightened demand for truck capacity has boosted freight rates, but the industry’s long-running shortage of drivers is probably the biggest factor, Reed said.
“It’s the obstacle everyone is trying to figure out,” Reed said.
Trucking firms are taking a multipronged approach to recruit new drivers, and that effort requires more spending. The easiest step is to pay higher salaries and offer signing bonuses, said Doug Combs, director of the transportation and logistics corporate finance group at the $124 billion-asset Regions Financial.
“Everyone is trying to steal drivers from each other,” Combs said. “If you pay them enough, you can get the drivers.”
But drivers want other things besides more pay. Operating an 18-wheeler historically has meant spending weeks away from home as drivers cross the country to haul goods. Because most drivers would like to spend more time at home, trucking companies have changed their routes to make them shorter, but that decreases operating efficiency, Holdbrooks said.
“They’re doing what they can to get drivers home more often,” he said.
Finally, young drivers want to sit behind the wheel of new trucks. Upgrading a fleet also helps trucking companies operate more efficiently.
Thus, there has been a surge in credit line utilization by many trucking companies. YRC Worldwide in Overland Park, Kan., one of the largest truck carriers, expects to add about 1,400 tractors and 3,800 trailers this year, CEO Darren Hawkins said during an Aug. 2 conference call to discuss earnings.
“The new tractors come with enhanced safety equipment, and we expect improved fuel mileage and less maintenance expense,” Hawkins said.
While these techniques can help a trucking company in the short term, there is a real danger of expanding too fast, Combs said. Some trucking companies may be expanding their fleets to handle increased demand from large shippers, but that runs the risk of having too much capacity in a downturn, he said.
“If you park 50 trucks and you’re not running them, those are assets you aren’t using,” Combs said. “Those tractors are idle, and they’re not bringing in any cash.”
Specific segments within transportation can also run into hard times. Some agricultural commodities are not being exported because of the escalating trade war between the Trump administration and China, said Curt Queyrouze, CEO of the $780 million-asset TAB Bank in Ogden, Utah, which specializes in loans to trucking firms.
“In agriculture, some of these commodities aren’t moving, so trucks aren’t hauling,” Queyrouze said. “It’s causing bottlenecks that go in a lot of different directions.”
Shippers are also very price sensitive and will easily switch to a rival if a trucking company does not have enough capacity, Combs said. So, most trucking companies want to have that capacity available now, even if finding drivers is difficult.
“The pay is really good for drivers right now, but the problem is finding people to pass the drug test and show up on time,” said Scott McComb, CEO of the $1 billion-asset Heartland Bank in Whitehall, Ohio, which lends to trucking firms.
And therein lies the age-old question for banks: How much exposure should your institution have to the hottest industry sectors? You can turbocharge your net interest income now, but a trucking company can default on loans during a downturn, or if it is hit with a rash of vehicle repairs.
“Right now, it’s a profitable time to be a trucker, and the only people who are bearing the burden of the rise in prices are the shippers,” Holdbrooks said. “The truckers that have staying power are the ones who have plans laid out. If you have a small fleet and one of your trucks’ powertrains go out, that’s a big expense.”
