Even in the best of economic times, new equipment can be quite an onerous purchase for a trucking company. A new heavy-duty truck can cost more than $140,000, and that ain’t chicken feed.
And 2008 was not the best of times. First, truckers saw a big jump in operating expenses as fuel costs went sky high in spring with the pump price for diesel above $1.40 per litre in June across western Canada and above $1.50 in Whitehorse. Then, in September, came the big market crash that prompted financial institutions to tighten their purse strings.
“I guess it’s hard for everybody to get credit,” says Glenn Cranwill at the Connexion Truck Centre in Winnipeg. “Various finance companies have raised what’s called their beacon score.” Loans are less expensive than a year ago, he adds, but fewer would-be borrowers qualify.
The hoops through which one must jump can be a serious headache, particularly for owner-operators. “Truckers are very time-conscious,” says Cranwill. “Time is money for them. If they have to take a lot of time off the road, that’s a problem for them.”
“Capital has dried up all over, but we’ve seen an increase in business,” Money In Motion’s Kurtis Chisholm observes from his office in Sudbury, Ontario. “For us there are obstacles, but we’re still able to do deals.
“We’re finding we’re able to get it done for owner-operators. As long as they’re still getting contracts, we’re able to get credit for them. With the larger fleets, there doesn’t seem to be a credit problem at all. We’ve found trucking companies in the mid-range in size have been hit the hardest.”
Money In Motion has its headquarters in Sudbury and four other operating offices, including one in Winnipeg. Its website says it provides a range of “custom tailored financing” to transportation, construction and other industries.
Financing options for that new equipment or expensive upgrades include loans, leasing and factoring.
Get some credit
Loans and credit lines are probably the first things that come to mind when the topic of financing comes up. Banks and credit unions are the traditional places to look for these services."There is a belief in the marketplace that banks are no longer providing credit,” remarks Allen Barabas, an executive at RBC Royal Bank. “That is not true. In fact, RBC is very much open forbusiness, and we have capital available for trucking firms.
“The process and qualifications required to obtain funding have not changed at RBC,” he adds. “We have always assessed the credit-worthiness of any company prior to providing funding to an entity. It is important to note that the costs of funds have changed for all credit suppliers. It has become more expensive for banks to lend, and as such, loans may be priced higher against prime than in the past.
“That said, given today’s low-interest-rate environment, many firms are finding that their borrowing costs may not have increased much if at all and in some cases may have actually decreased.”
Barabas says commercial account managers at RBC branches across Canada provide “individualized financial solutions” and the bank’s team includes specialists in the transportation sector.
Trucking firms will find many financing options available at banks, he says from Toronto. “For example, RBC offers a retrofit program to help trucking firms that are considering reducing their carbon footprint by upgrading their trucking fleet or warehouse facilities. These solutions can be conducted in a form of term loans,leasing or commercial mortgages.”
Use those assets
Barabas recommends companies look into asset-based lending to tackle the challenge of paying for equipment expenditures. One option under the category of asset-based lending is factoring, a.k.a. accounts receivable financing.Many transportation companies use factoring to meet cashflow demands or seize growth opportunities at a time when there aren’t the financial resources to make it happen, Jennie Bugg says from J D Factors’ national headquarters in Mississauga.
Essentially, factoring is the sale of accounts receivable to another company in exchange for a line of credit. The creditor takes a percentage of the receivables and the trucking company (in this case) gets quick access to money for operating and capital expenses instead of having to wait for customers to pay up.
Bugg says J D Factors has both big and small factoring clients in the transport industry – from $10,000 a month in invoicing to $4 million a month. The companies typically get 95% of accounts receivable right away, then another 3% once J D collects, but it varies according to circumstances.
Besides giving your company quick access to cash, factoring also “relieves you of the considerable time, energy and effort and expense required to follow up with customers to ensure timely payment,” Liquid Capital Corporation’s website declares. Instead of you or your employees pursuing clients for payment, the factoring company does that for you.
Brian Birnbaum, Liquid Capital’s Chief Operating Officer, offers a hypothetical example to illustrate this case for factoring. A firm with $600,000 a year in receivables might pay a 4% factoring fee (the percentage varies according to a number of particulars). That’s just $24,000 a year – a lot less than the salary of a full-time employee - to have someone chase down receivables.
“So they get the money they need and they also get the whole accounts receivable administration that they would otherwise have to pay staff to do,” Birnbaum says from Toronto.
Liquid Capital has an office in Saskatoon, as well as principals in Edmonton, Calgary and several other Alberta centres, and most other provinces.
Lease or rent it
Leasing instead of buying can carry significant tax advantages,especially since the Canada Revenue Agency changed its rules in 2001 following a Supreme Court ruling (Income Tax Technical News Bulletin 21, June 14, 2001).On the other hand, leasing can be more expensive than buying, depending on a number of variables. NationaLease has “Lease vs. Buy Worksheet” on its website (NationaLease.com) that managers may find useful in addition to consulting a qualified professional to help evaluate all the available options for financing.
Among the touted advantages of leasing are the preservation of credit lines and the conservation of working capital. Also, a “full-service” truck or trailer lease can lighten a company’s burdens through maintenance and roadside assistance services that are part of the lease agreement.
Leasing can be the best option for a transport company eyeing equipment acquisitions to grow or remain competitive, says Classic Capital Inc. Winnipeg representative Errol Tapper.
“With all the changes in the credit markets and the withdrawal of some of the financial companies that had previously offered accessible financing, it has become more difficult to obtain the credit if there are any tarnishes in the credit history of the applicant,” he notes. “Where before, some minor infractions in the credit history may have been overlooked, this now has become a reason for a credit-granting institution to say no.
“It is imperative that, when seeking the financing, any applicant has all the information readily available to present. That includes financial statements and tax returns, as it takes more effort today to satisfy the credit investigation process.”
A Canadian company, Classic Capital specializes in financing for customers and equipment dealers in transportation, construction and other sectors. It offers services related to leasing and financing, to help companies get the equipment they need on flexible terms that meet their budgets.
If leasing or purchasing doesn’t work for your business, you might want to rent. Or you could go yet another route: rent-to-own. It requires no money down and gives you the option of purchasing eventually. “It’s right between a purchase and a lease,” Harry Dornn says from Maxim Truck & Trailer’s head office in Winnipeg.
Under its rent-to-own program, Maxim allows customers to build equity in their rental equipment and apply up to half of their rental charges toward a down payment for purchasing.
Maxim, which has 15 branches, has also introduced a two-year lease product for those who aren’t comfortable with a typical lease of five years or more. Think of it as an option between rent-to-own and standard leasing.
In short, there are many financing options out there, and no shortage of people ready to assist transport companies in the equipment acquisition process.
Money In Motion’s Chisholm says, in his experience, he can nearly always find a way to overcome the obstacles.
“Sometimes it’s just a matter of digging a little deeper (to find a way to get financing). We need to see how an operation is working so we can find information that could help them get financing.”
He’s optimistic for Money In Motion’s trucking clients despite last year’s “perfect storm” of economic calamities, saying “I would tell people to just turn off their radios and televisions and go to work.”
