Ask any fleet executive or lender about financing truck purchases today and the first thing you are almost sure to hear is, “Things have really changed.” For borrowers and lenders alike, the marketplace, the loan application process and even the working relationship between a company and its financial partners have all been transformed by the events of the past three years.
“Trucking is such a volatile business,” observes Tom Stephens, executive vice president for Paschall Truck Lines, Inc. headquartered in Murray, Kentucky. “We first knew that the country was heading for a recession in May of 2000. Then 2001 began slowly for us, and by November and December of that year it was like somebody dropped a cement curtain down. The hottest run the industry ever had was all over. Many old lending institutions began to back away from the trucking industry entirely. The lenders still here are more active in the industry as a whole and more involved with their trucking customers' businesses.”
IN THIS TOGETHER
“Over the past few years, we've seen finance sources get in and out of the market, and we've seen others decide to shift their focus to different business segments,” adds Anthony Bandmann, director, sales, marketing & remarketing for DaimlerChrysler Services, Truck Finance. “Of course, as a captive finance company [for Freightliner LLC] our sole focus has always been the trucking industry, as it is for other lenders tied to manufacturers. To truly serve a market as specialized as trucking, you have to understand the issues and the dynamics of the business, whether you are a captive or independent financial institution.”
“As the economy has changed, so has the financing community,” agrees Gregg Plese, CFO for Premier Transportation, a Georgia-based carrier hauling primarily for retailers. “Today, it is much more about partnerships between carriers and their lenders. In the past year, for instance, we moved from TRAC-type leases to purchasing our equipment. Interest rates are favorable now, the ability to depreciate equipment faster gives us a tax advantage, and if we wanted to grow, we realized that we needed a long-term financial partner interested in our whole business.”
Interested in the whole business means exactly that, observes the veteran CFO of a top national truck fleet. “Now carriers have to be prepared to share more information about their entire operation than when the economy was going strong, financing was based on debt-to-equity ratios and equity was based on the book value of your equipment,” he says.
“Today, book value has largely been replaced by market value as a measure of equipment worth. Since market value is a moving target, the equity you have in your rolling stock can unexpectedly drop, even before a loan is paid off,” he explains. “That has made it tough for both carriers and lenders.
“When you add this factor to general economic downturn and the number of repossessions and bankruptcies among fleets and owner-operators, it is probably no surprise that there has been an increased aversion to credit risk on the part of the financial community,” he continues. “As a result, it all comes down to balance sheet strength today. Lenders all measure cash flow in some way, looking for reassurance that you can and will make your payments.”
AH, SWEET CASH FLOW
Strong financial statements are important to lenders, of course, because of what they indicate about the vitality and staying power of a potential borrower's business. “Economic growth covered up a lot of problems for all of us, borrowers and lenders,” observes Tom O'Bryant, senior vice president and managing director, surface transportation for LaSalle Bank, N.A. (a subsidiary of ABN AMRO). “The financial community is more disciplined now, I think, and so are many carriers.
“Lots of truckers still get into trouble, though, because they don't pay attention to their financials, their ratios. Risk is not just associated with the changing market value of the trucks, but with the performance of the company. Lenders today look much more carefully at financial covenants, at performance benchmarks that the borrower agrees to be measured by, to keep tabs on the company's health. This whole-company approach has helped the financial community to do a better job of calibrating risk.”
For would-be borrowers, this new approach is not necessarily good or bad, but it is definitely the way things work now. It can be helpful, therefore, to take a look at how a very successful large fleet prepares for and manages its equipment financing. While the financing process for smaller fleets and owner-operators will be different, there is still much that can be learned regardless of your company's size.
FOLLOWING THE LEADERS
“We always have companies bidding for our business,” says the CFO quoted earlier in this report, “and we always borrow at below prime without any personal guarantees on any of the equipment we buy. It has been like that for years now for us, but it has taken a lot of hard work to get here and you can never rest. The better it gets, the tougher you have to be. We do quarterly reporting to our lenders, for example, and at the end of the year the results in those quarterly reports equal the audited results, with no adjustments.
“We prepare formal Power Point presentations for our lenders, showing them how we are doing, how the industry as a whole is doing, our plans for growth, the challenges we face, the successes we've had and our goals for the future,” he explains. “If our actual performance is off compared to the business plan, then we let them know why it is off and what we are doing to improve things. If the issues impacting our progress are outside our control, then we modify the business plan accordingly. Good planning and financial information prepared with care and integrity gives our lenders confidence and makes them comfortable about doing business with us.”
Good planning, professionalism and accountability don't seem like very new concepts, nor do honesty and integrity. Perhaps then, this new approach to financing is not so very new after all. Maybe it is just a sign that the trucking industry and its financial partners are getting back to the business basics that first built the industry and will keep it vibrant and vital for years to come.
Finding the right lender
Establishing a long-term relationship with a lender can be of great benefit to a fleet, so it makes good sense to choose your financing partner very carefully. Here are some questions that can help you determine if a particular lending organization is right for your operation:
Does the lender have a history of serving the trucking industry or are they new to this market?
What types of loans do they provide? Are there maximum limits?
Where are credit approvals actually decided? Can they explain the application and approval process so that it is clear and easy-to-understand?
Do they have other clients with operations similar to yours with whom you might speak?
How willing are they to adapt their programs to meet your needs?
What happens if you hit a rough period and fail to meet a financial covenant or cannot make a payment on time? Will they stick with you?
Does the lender understand your type of operation? This is particularly critical for specialty haulers who may have unique business cycles, risks and obligations.
How sound is the financing institution itself in terms of financial stability, management strength and reputation?
Do you have confidence in the lender? Do you believe you can trust them to act in your best interest?
*Note: the Truckload Carriers Association (TCA) provided some of the material for this checklist and other how-to sections included here. For more information, go to the Information Center/Business Operations at www.truckload.org or contact TCA and ask about “Getting the Bank to Say ‘Yes,’” (Telephone: 703-838-1950).
So, how do I look?
When a lender is considering your company as a possible client, all their questions derive from one central concern: will you repay the loan as agreed or can they recover their investment by some other means if you default? In order to make that assessment, lenders today typically want to know more about your business than the size of your down payment and the value of the equipment you plan to purchase with their help.
Here are some suggestions to help you structure the environment for success when you meet with lenders:
If you do not have a business plan already, take the time to develop one that includes information about your company's history, goals for the future, strategies for achieving those goals and an assessment of your market and the key competitors within it.
Prepare a complete package of financial information for the lender to review, including balance sheets, cash flow statements and income information.
Compile a list of your key accounts and target accounts.
Offer clear information about how the equipment you plan to purchase will help you to achieve your long- and/or short-term goals. It is easier to get funding for additional trucks, for example, if you can demonstrate that you are fully utilizing your existing capacity and have new business in-house or pending that requires the additional equipment to handle it.
Have complete and accurate information ready concerning current creditors, liens, any discrepancies between financial reports and annual audits and any pending lawsuits or other issues that may impact your cash flow or otherwise adversely affect your company. Scrupulous honesty about these matters right from the very beginning is the best policy; lenders, like borrowers, really hate surprises.
Don't forget to also showcase your strengths such as management experience and expertise, a stable workforce or other competitive advantages like investments in new technologies, advantageous location(s) and reputation. Just like borrowers, lenders want to feel assured that their faith in you will not be misplaced.
SPEAKING OF FINANCING: A glossary of common terms
Every business, from trucking to finance, has its own language, its own lexicon of terms and acronyms. For insiders, these words and phrases serve as conversational shortcuts that make conducting business easier and faster. For outsiders, they can be obstacles that get in the way of getting the job done. The only options are to find a good financial interpreter you trust or to learn the lingo yourself.
Amortization: The reduction in value of a tangible asset such as a tractor or trailer by pro-rating its cost over time. Or, the gradual elimination of a debt such as a loan by making scheduled payments over time.
Book value: Refers to how a company accounts for/depreciates the equipment and other assets it owns. In the past, financing was often based on book value.
Cash flow: The money flowing in and out of a business, specifically, the money available month-to-month to pay bills, make note payments, pay employees and fund other expenditures.
Debt service: Required payments of a loan principal plus interest over a period of time.
Depreciation: The value assets lose over time as they wear out or become obsolete.
EBITDA: Earnings Before Interest, Income taxes, Depreciation and Amortization.
Financial covenants: Benchmarks or performance goals that a borrower agrees to meet in order to obtain financing from a lender, such as a maximum total indebtedness to cash flow ratio.
Fixed costs: Regular expenses such as insurance, payroll and mortgages that are incurred regardless of the level of business activity.
Market value (also referred to as fair market value): The dollar amount you could actually get from a buyer if you sold a given tangible asset like a truck tractor on the open market. Market value changes over time and may or may not be approximately the same as book value. It has generally replaced book value as the basis for financing.
Operating Ratio: Operating expenses divided by revenue.
TRAC lease: A lease with a Terminal Rental Adjustment Clause. TRACs guarantee leasing companies that the equipment being returned at the end of the lease period will have a fair market value of an agreed upon amount or the lessee will make a final “balloon” payment to cover the difference.
Variable costs: Expenses such as fuel or replacement parts that change with the level of business activity. If all of a fleet's trucks are parked, for example, fuel costs disappear but fixed costs like the truck payments remain.