The Tightening of Credit is Getting Real
Better late than never, it is time for the June 2024 edition of Al’s Corner.
Our next big event is on July 16th. Horse Hooky begins at 12:30 at FanDuel Park. This outing is always one of our most laid-back days and can be profitable if the horse racing gods align. Last year, during the last race, four of us pooled our money and bet $40. Amazingly, we got a return of $110 each, which was easily our best return ever. So, it can be done. My rules for betting are: always bet on the grey horse, bet on the horses with more than two spotted feet, and find the best-dressed trainer as that person thinks they will win and thus get their picture taken at the finish line! Very scientific and guaranteed to produce positive coinage!
June’s Timely Topic—the higher interest rates are beginning to really wreak havoc on issuing credit to companies. For years, many (not all) shippers and large manufacturing companies have been slowing down on their payment terms. The idea was that a transportation company would give the customer shipper a few months before they had to pay, and then it would flow freely after that. You were making an investment in the customer. Now, since this has been a prolonged shipper’s market (rates being low and in their favor), quite a few large companies have been trying to stretch out their payment terms even more. An example would be—30 days payment years ago, now up to 60-120 days or more. Some industry experts have said that a few large manufacturers would like to go a year without paying for loads that were picked up and delivered 12 months ago. For me, this ridiculous trend was going to come to a head when interest rates reached 7%. Now, me not being an expert on interest rates and money in general, my thought was if you can put your money in a money market account and get a 5% return, why do this? The financial gain without doing invoicing, chasing payments, and hiring trucks would be safer and easier. Especially since the shipping rates have been reduced downward to where it is easily seen that if a transportation company makes 10% profit, but 7% is eaten up by high-interest rates (carrying the money), it just is not worth it. This is especially true when you factor in the risk of someone not paying at all.
When money was cheap at 2-3%, huge transportation companies in our industry would do anything to gain vast amounts of loads and business. It gets tricky with all this when a transportation company agrees to some long payment terms, then has to try and go back to the shipper and renegotiate these terms. The problem with this is that many large shippers feel they can go to the next company and get those longer terms. I am not sure about this now, as much of the private equity money is getting more cautious due to the excessive cost of money and the ease of making money through other avenues, like banks, CDs, and the stock market.
History of Growth in the Transportation Industry
The old way was to be big and undercut rates with the goal of getting new business and then raising the rates later. In other words, price the weaker, smaller companies out of the business.
The new way was based on the private equity model of putting huge private equity money into a company and buying their way up and in until they hit critical mass, losing all the way there. The idea was once you got big, the profits would be there. Lately, that has not worked as several large logistics companies have closed. I even had a large shipping company tell me a few years ago that a billion-dollar, new player had cornered the market on small carriers with their use of a driver portal. That was why they were so cheap. I told them, no, it is not the case. The next year, the large logistics company raised their rates and ultimately, they were not used the next year. What was even worse was that the shipper really thought they had cornered the market and had lower prices. They didn’t see they were just buying their way in.
Financial Overview
I read all the time about transportation and logistics companies, mostly the largest ones. Many right now are listed as weak investment opportunities. This tells a big story. To me, it means that even the biggest not only have to watch their head counts but profits and terms as well.
That’s it for this month’s article. Watch for next month’s Al’s Corner; it will be my last one after 15 years. I promise that it will be very humorous as I discuss my journey in transportation and sales.
Thanks, and have a great month!
Al