Along with the pressure caused by the national driver shortage, ELD regulations and continued detention rate issues, transportation companies are now feeling the effects of low freight rates. In Q1 of this year, dry van spot rates decreased by close to 25%, going as low as $1.86 in March (Zipline Logistics, 2019). Although rates have settled slightly in Q2 and are hovering around the same price as they were in the summer of 2017, carriers are still suffering from low profit margins. Operating costs like driver wages and maintenance costs are continuing to rise despite lower spot rates (Freight Waves, 2019). Because of this, owners are deciding to sit their trucks.
However, idling part of your fleet is not a sustainable business plan, and owners will need to make some significant business decisions to stay profitable. The companies that are holding out for rates to increase or to negotiate a decent contract rate to continue hauling will need a temporary solution to pay their insurance, plates and the 2290 taxes due in August. Here are a couple of ways carriers can alleviate the financial burden from the current freight rates:
With 2019 freight rates so low, some carriers are sitting their trucks rather than drive up the mileage on them. However, if they are still paying for these trucks, they may not be making enough money to support the monthly payment on their idle trucks. In addition, companies must also contend with all of the fees that transportation companies are expected to pay, including the 2290 Heavy Highway Vehicle Use Tax due each August, as well as insurance and annual plate fees.
One way to combat this issue is to consolidate and refinance existing debt. This may give a carrier the option to extend the terms on loan(s) to lower monthly payments. Some banks might be hesitant to refinance equipment when freight rates decrease because they are only considering debt-to-income ratio. However, at Commercial Credit Group (CCG), we like to look at character and collateral, not just cash flow. Plus, we know what trucks and trailers are actually worth and are not solely reliant on what a balance sheet suggests.
Another suggestion is to refinance free and clear (paid for) equipment to secure a working capital loan. The equity that has been built in that equipment will serve as the collateral for a loan providing cash out to help reduce the financial burden instigated by the low freight rates.
Other businesses may find it beneficial to factor their invoices in order to improve cash flow and help alleviate the financial burden from current freight rates and taxes. Accounts receivable financing, also known as invoice factoring, is a way for trucking companies to collect on their receivables when a service has been provided, instead of waiting up to 90 days for the shipper to pay. Once an invoice has been issued, the carrier will send that invoice to the factoring company and receive cash almost immediately. This can help improve cash flow and ultimately give transportation companies the capital they need to keep trucks on the road while freight rates are low.
Refinance your equipment to lower monthly payments and/or secure a working capital loan. Or finance your receivables to improve cash flow. Either way, Commercial Credit Group Inc. and our affiliate, Commercial Funding Inc., are here to help!
Sources:
https://ziplinelogistics.com/blog/q2-trucking-market/
https://www.freightwaves.com/news/trucking-rates-have-fallen-back-to-2017-but-costs-have-not