Lending to the Trucking Industry
Zeller, Tina A., Journal of Commercial Lending
Credit needs in the trucking industry are fairly straightforward and usually consist of revenue equipment financing requests, working capital facilities, or letters of credit to provide foundations for workers' compensation and "self-insurance" programs. However, extending credit to this hodgepodge industry is difficult: Failures are common, and ambiguous terms, limited reporting requirements, and little commonalty among participants exist.
The key to lending to the trucking industry is not expertise in specialized lending techniques but, rather, an understanding of a complex industry. Successful lending comes from deter mining a borrower's creditworthiness and from appropriately structuring the loan.
The trucking industry is made up of owner-operators, brokers, and trucking companies.
Loans to Owner-Operators
The owner-operator is an individual who owns a tractor (a truck with a short chassis and no body) and may, although not always, own a trailer (a highway vehicle designed to be hauled by a tractor). An owner operator negotiates for or uses a broker to obtain loads, or he or she may supply services as an independent contractor to a trucking company.
When evaluating an owner-operator's business, look for at least three years of consistent profitability. This profitability should be verified by tax returns.
To assess cash flow, it is necessary to investigate the owner-operator's income generation and cash uses.
Income Generation. Contracts to haul for shippers on a regular basis generate the most stable income. If one shipper represents a significant portion of an owner-operator's income, a copy of the contract and the shipper's credit history should be obtained. Brokered loads represent the next most reliable type of income. Investigate the broker's reputation, stability, and credit history. The least stable income scenario is one in which the owner-operator works as a free agent ("gypsy"), getting loads on an informal basis.
It is also important to determine how the owner-operator is compensated. In general, there are two methods: cents-per-mile and revenue split. Cents-per-mile compensation works just as its name implies. Under the revenue split method of compensation, the owner-operator is paid a portion of the fee up front, and these funds are used to purchase gasoline, lodging, or other travel necessities. After the load is delivered and a delivery receipt is received, the owner-operator is paid the balance.
Cash Uses. Normal cash expenditures for an owner-operator show up in tax returns, personal financial statements, and credit bureau reports. These expenditures include a number of important items that warrant attention, including the expenses for home-state license plates ("tags"), fuel permits ("decals"), and insurance.
Contingent expenses also need to be analyzed. If an accident occurs, for example, the owner-operator is responsible for the deductible amount of insurance, the costs that exceed insurance coverage, and the cost of cleanup for spilled or scattered loads not covered by insurance. No one can predict when an accident will occur, but the owner-operator's safety record can provide clues to probability.
Another important factor to consider in the generation of income is how often the owner-operator "dead heads," that is, returns to the point of origin with an empty trailer. This practice can severely affect the profit ability of a load.
Because the hauling contract typically contains an indemnity clause, the loss of perishable goods owing to mechanical failure or weather conditions is usually borne by the shipper. However, it is prudent to verify who bears the liability before assuming that the owner-operator is exempt.
A loan request from an owner-operator usually involves the purchase of a tractor, a trailer, or both. This type of request is considered to be very risky because the primary source of repayment (that is, cash flow) depends on the success of one person -- the owner-operator. …