Credit Crunch

by James Menzies

TORONTO, Ont. – There’s a widely-held belief in the transportation industry that the global financial crisis is preventing trucking companies from accessing the capital they need to grow their businesses.

In the Ontario Trucking Association’s (OTA’s) Business Pulse e-Survey for the fourth quarter of 2008, 72% of fleets reported their access to credit was tightening.

It was only marginally better during the Q1 2009 survey, with 67% of respondents saying their access to credit was tightening and 33% reporting ‘no change.’ (Not a single fleet said its access to credit was easing).

While it may appear that financiers are feeling rather ungenerous these days, the reality is that the tightening credit situation is more a reflection of the deteriorating state of the industry’s collective balance sheets, according to lenders.

“We have not changed any of our underwriting criteria or our procedures to evaluate the creditworthiness of prospective clients,” insists Patrick Palerme, president and CEO of GE Capital Solutions. “We have observed signs of deterioration of companies’ balance sheets as a consequence of the poor economic conditions.”

David Brown, national sales and marketing manager with Daimler Truck Financial, agrees.

“There’s no shortage of money available,” he says. “The larger and better-financed companies have had no problem getting credit. I think what has entered the market somewhat, is funders have gotten more selective to a degree.”

While large-scale, truck-centric lenders are still doling out the money to stable trucking firms, some smaller finance companies have left the market due to funding issues of their own. And big banks are shying away from trucking companies, due to the high level of risk associated with the industry.

Palerme said the crisis may have peaked in the fourth quarter of 2008, with some stability returning to the market early this year.

“The extreme and unprecedented volatility seen in the last quarter (of 08) made it difficult for us to intelligently price deals in the last quarter,” he says. “Since the last quarter of 08, the situation has improved a lot for us and it’s business as usual.”

So the good news is credit is still available for transportation companies.

The bad news is that prospective lenders will be going over your balance sheet with a fine-toothed comb to ensure their investment is safe.

With a rapidly-falling loonie, evaporating southbound freight, volatile fuel prices and general economic malaise, be prepared to open your books to lenders.

“When we meet customers, we ask to see their latest financial trends,” explains Palerme. “Any prudent lender will look at the balance sheet and make sure our customers will survive in the long-term.”

They look to ensure the fleet is collecting appropriate fuel surcharges, charging profitable rates, etc.

“One thing that never changes year in and year out, cycle in and cycle out is: balance sheet strength; operating ratio; working capital ratio; all those key ratios are king,” adds Brown.

“And in a capital-intensive industry like trucking, the better financed you are, the more consistently profitable you are, the better able you are to weather the ups and downs.”

There are steps a company can take to improve its chances of obtaining credit when it’s needed, even in an uncertain business environment, according to GE’s Palerme.

1. Diversify lending sources: “Don’t put all your eggs in one basket and keep a relationship with just one lender,” Palerme suggests. He advises customers to shop around, compare rates and services and develop relationships with multiple lenders.

2. Plan ahead: Look ahead and anticipate when financing may be required, suggests Palerme. If you’re a small fleet especially, “Don’t come suddenly and say you need financing for three trucks this week because you’re getting deliveries on the weekend.”

3. Set up a pre-approved line of credit: Applying for a line of credit will ensure you have immediate access to money when the need arises unexpectedly. It will also allow you to develop a relationship with your lender and discuss future financing options.

4. Reassess your needs quarterly: Palerme suggests constantly reevaluating your financing needs on a quarterly basis.

5. Communicate with your financial partners: Keep the communication channels with your lenders open at all times, advises Palerme. Keep them informed of challenges and changes affecting your business and always be honest.

If you do qualify for credit, expect to pay more for it.

While interest rates on big ticket items like mortgages and passenger vehicles may be dropping, the same cannot be said for finance rates on new equipment.

“Before the financial meltdown, the transport industry was benefiting from the best interest rates the industry has ever experienced,” says Palerme. “But the risk/reward equation was not working at all – the rates were very small and the risks were still pretty high.”

Daimler’s Brown says rates are still very attractive for well-financed, profitable fleets.

“The better-financed fleets are getting extremely attractive rates right now, for those fleets where the balance sheet is not as strong, the rates go up.”

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