Financing in tough times

Fleets are still having a tough time getting financing for trucks and trailers. Even though the U.S. as a whole is pulling out of a nearly year-long recession, trucking is beset by a host of problems. Freight volumes remain down anywhere from 5% to 13% lower than last year, depending on the market crippling the industry's ability to handle sharp increases in insurance premiums and fuel prices. Christopher

Fleets are still having a tough time getting financing for trucks and trailers. Even though the U.S. as a whole is pulling out of a nearly year-long recession, trucking is beset by a host of problems. Freight volumes remain down — anywhere from 5% to 13% lower than last year, depending on the market — crippling the industry's ability to handle sharp increases in insurance premiums and fuel prices.

Christopher Roback, business development manager for Mack Commercial Finance, says those factors make it far riskier to lend carriers money for capital purchases, especially for truckload and less-than-truckload carriers.

“TL and LTL carriers do not need anyone to tell them how difficult it has been, given the general economic decline of the past year. Increases in insurance and fuel prices, plus a marked decrease in the market value of their equipment have all contributed,” he says. “Consequently, for-hire TL and LTL carriers are having a very difficult time.”

Mike Clemmer, product development manager for DaimlerChrysler Services, points out that the rough economic waters in trucking over the last few years have also hurt the financial institutions that provide capital to the industry. In fact, there were nearly 4,000 trucking bankruptcies in 2001 — the highest rate the industry has experienced in 15 years.

“Today, lenders to the trucking industry have almost had to view their participation as venture capitalists,” says Clemmer. “Finance companies — from banks to captive OEM finance institutions — have all been burned badly by the recent downturn. As a result, we may now be asking for a lot more information beyond a simple credit application when a trucking business wants financing.”

In the past, a finance company might have asked a fleet for minimal financial data; now they will demand answers to a broader list of questions.

“Over the past two to three years, we've been digging much deeper into information about a fleet — who their customers are, what routes they run, what mix of freight they carry,” Clemmer says. “We also want to make sure there's a long-term business plan. We don't want to go into a situation where bankruptcy and repossession might occur; that's not good for the fleet or for us.”

How did financing that was so easy to obtain just a few years ago get to be so tight? Actually, that easy financing is partly responsible for today's problems.

According to Chris Visser, commercial truck manager for the Official Commercial Truck Guide, a used truck guide published by the American Truck Dealers group, manufacturers and finance operations developed easy credit and reduced-rate finance packages in the 1990s to increase market share.

Those tactics boosted new truck sales to unheard-of levels by the end of the decade, Visser says. Most of those finance packages, however, included pre-determined trade-in cycles, usually about three years, and guaranteed residual values. This, in turn, created a used-truck glut.

Visser says that when big fleets traded in their trucks, OEMs, finance companies and, in some cases, lessors were obligated to honor the guaranteed residual values. Because of the sudden and large influx of used trucks at the end of the 1990s, these values ended up being far greater than the market value of the equipment, he explains. This led to a large number of defaults and bankruptcies, as well as an overall tightening of the credit lines.

Many finance companies shied away from risk or exited the commercial truck business altogether. With money harder to obtain, there were fewer potential buyers for new trucks as the 21st century began. The timing couldn't have been worse, since the industry needed buyers to stave off one of the worst market slumps in history.

By the end of 2001, insurance rates began to climb (from 37% to 120%, according to an ATA study), fuel prices were on the rise and the economy went into a recession. That made it all the more difficult for fleets and owner-operators to make a profit, much less stay in business, Visser explains.

Which brings us to today's new financing rules.

“A fleet should put itself in the finance company's shoes,” says Mack's Roback. “We are making an investment in your operation, so we want to know where you've been as a company, where you are today, and where you're going. Full financial disclosure is important. If a trucking company tries to keep its finances close to the vest, it makes the lending decision much more difficult and slows down the process.”

For fleets that want to finance some or all of their equipment purchases, finance companies have a few tips on what kind of information they'll want to see.

Toby Zeman, marketing manager for Ford Commercial Credit Lending Services, says fleets are expected to provide tax returns, financial statements, and credit references with their credit applications. Fleets should also provide information about the structure of the current fleet — types of vehicles and what they're used for — plus a detailed business plan. If the business is privately owned, personal financial statements may also be needed. “We like to see personal guarantees for general financial transactions for closely-held companies,” says Zeman.

“The buzzword here is ‘transparency.’ The more information you share with us that clearly outlines your current and future business strategy, the better,” Zeman adds.

The people at the top can also make a big difference when it comes to credit approval. “We like to see experienced management in a company; people who really understand the business,” says Zeman.

DaimlerChrysler's Clemmer adds that many financial companies want to look at operations data in light of the fleet's business plan. “The questions they are asking include, Are you hauling on profitable routes? Are you hauling on the right routes? Do you have a steady business? What mix of freight do you haul? What have you done to get a rate increase or fuel surcharge? Are you managing your receivables and cash flow?”

Clemmer insists that what finance companies are trying to do is validate a fleet's business plan to help ensure they've done everything they can to put their operation on solid footing.

“You have to do your homework; you have to show the lender that you have looked at all your expenses and taken as much excess out as you can,” he says. “We are trying to have more direct contacts with fleets so we can get into their heads and help them analyze their business plan, to make sure we both have confidence in the future of their operation.”

Fleets have to realize that the credit application provides just an outline of the financial picture lenders are trying to paint. According to Clemmer, “The information the fleet provides allows us to fill in that picture's colors — hopefully bright ones, which means we'll say ‘yes’ to their credit application.”

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