How do trucking companies get a line of credit?

The cash cycle of a load

A carrier is out of pocket for every load before it can bill for it. Fuel, tolls and driver pay go out while the truck is moving; the invoice can only go out once the load is delivered and the paperwork is back. The customer then pays on its own terms. The line of credit exists to carry the business across that stretch.

Two points in that table matter most to a lender. First, the gap between delivery and invoice is controlled entirely by the carrier: a fleet whose drivers send paperwork from the dock borrows sooner than one that collects it at the end of the week. Second, fuel is the largest variable cost and the one that cannot wait, which is why so many carriers end up relying on fuel card credit and on factors that offer fuel advances. A line sized properly should make those unnecessary.

Who holds what: the lien map

A trucking company's balance sheet is mostly equipment, and the equipment is almost always pledged already. Tractors and trailers are bought with equipment loans and leases whose lenders hold a purchase-money security interest in each unit. A line lender's lien on receivables sits beside those, not on top of them.

Before a line lender funds, it searches the public lien filings. Carriers are often surprised by what turns up: a factor's filing that was never terminated, a fuel card company's blanket filing, an equipment lessor that filed on all assets instead of the specific units. Each has to be released, narrowed or subordinated. See blanket liens and a new line and equipment financing alongside a senior facility.

Owned trucks can add to the line. Some asset-based lenders will lend a term piece against an appraisal of unencumbered equipment; the mechanics are in machinery and equipment in an ABL.

What makes a freight bill eligible

The standard rules apply: invoices more than 90 days past invoice date are typically ineligible, and a single customer is commonly capped at 20% to 25% of eligible receivables. Trucking adds its own:

• Complete paperwork. No proof of delivery, no eligibility. Field examiners pull invoices at random and ask for the matching documents.
• Broker credit. Much of a small carrier's freight comes through brokers, and a broker's ability to pay depends on its own shippers paying it. Lenders look at each broker's credit and payment history, and may set lower caps for weaker ones. Freight booked directly with shippers generally counts as stronger collateral.
• Accessorials. Detention, layover and lumper charges are frequently disputed. Some lenders exclude them until paid.
• Short-pays and claims. A shipper that deducts a cargo claim from payment creates dilution. A pattern of it lowers the advance rate.
• Quick-pay discounts. Brokers that pay early in exchange for a discount leave the carrier with less than face value, which the lender also counts as dilution.
• Verification. Because freight fraud and double-brokering exist, lenders to carriers verify invoices with customers more often than lenders to most industries.

A carrier with half its revenue from one broker has a concentration problem even if that broker pays well. The excess over the cap drops out of the base, which is a common reason a carrier's line feels smaller than its receivables. The fuller treatment is in what lenders look for in an AR aging.

Truck payments decide the line

In most industries the line is judged mainly on its collateral. In trucking, the fixed charges come first. Equipment debt service is large, it is paid whether the trucks are loaded or not, and it ranks ahead of anything the line lender can do about it. A lender therefore tests whether cash flow, after the capital spending that is not financed and after taxes, covers all debt service, equipment included. That is fixed charge coverage, and it is where many trucking applications are decided.

Conventional bank lenders commonly look for debt service coverage of at least 1.25x. The fleet on the left sits right at that line; the same fleet after adding trucks falls to barely one times, with almost no cushion for a soft freight month, even though nothing has gone wrong. Asset-based lenders set their own coverage level, but the direction is the same. Lenders know expansion looks like this, and they will read a fleet plan with its ramp-up. But a carrier that adds equipment without talking to its line lender first can trip a covenant it did not know it was close to.

Freight markets make this harder. Rates and volumes move with the economy, with the produce and holiday retail seasons and with the weather, and a spot-heavy carrier's revenue can drop sharply while its truck payments do not. Lenders look for a mix of contract freight, a fleet sized to the business it has rather than the business it hopes for, and two or three years of results through at least one soft market.

Factoring, a line, or a bank

Factoring is how many small carriers finance receivables. The factor buys each freight bill, checks broker credit, handles collections and often offers fuel advances. It asks less of the carrier's own financial statements, which suits a young fleet. It also costs more and puts the factor's name on every invoice.

An asset-based line suits a carrier with steady customers, accrual financial statements and the discipline to report weekly. It costs less, and the carrier keeps its customer relationships. A bank cash-flow line, sized on earnings rather than collateral, is realistic for a larger, consistently profitable fleet with clean coverage. The comparison is laid out in factoring vs asset-based lending and recourse vs non-recourse factoring; the mechanics of switching, including releasing the factor's lien and redirecting customers, in moving from factoring to a line.

Transparent's lender book includes 235 lenders that write asset-based loans and lines, 116 that write factoring and 244 that write equipment, which matters in an industry where all three sit in the same capital structure.

Reporting and covenants

• Frequent borrowing base certificates, often weekly and sometimes with each batch of invoices, with the invoice schedule and backup available on request. See preparing a borrowing base certificate.
• Notices to customers to pay into a lender-controlled account, and collections swept against the line. See cash dominion and lockboxes.
• A fixed charge coverage covenant, and limits on new equipment debt without consent.
• Insurance and authority. Evidence of cargo and liability coverage, with the lender named where it has an interest, and a current operating authority and safety rating. A lapse in either can stop the business overnight, so the loan agreement treats it as a default.
• Field exams that test billing against delivery documents and collections. See field exams.

What trips carriers up

• Merchant cash advances, taken for a repair or a slow month, that sit on the same receivables. They are paid off at closing; see refinancing cash advances for trucking companies.
• Cross-defaults between equipment notes and the line: missing one truck payment can default everything. See cross-default clauses.
• Trucks titled to the owner or a sister company and leased to the carrier. Lenders will want the lease documented and the affiliate included in the review.
• Tax arrears on payroll, fuel or highway use taxes, which can produce liens ahead of the lender.
• Owner-operator settlements with no clear record of what was deducted and why.
• Buying trucks from the line. A revolver that funds equipment is permanently drawn, and a permanently drawn line cannot absorb a slow month.

Preparing the file

Transparent's line of credit checklist: an AR aging by customer with days outstanding; an AP aging; the balance sheet and P&L; a year-to-date P&L through last month-end; a debt schedule showing existing liens; and, if available, bank statements and two to three years of business tax returns. For a carrier, add an equipment list showing each unit's lienholder and payoff, the customer list split between shippers and brokers, and current insurance certificates.

Transparent builds the lender package from those documents in a day, and charges nothing before a loan closes. Carriers hauling specialized or local freight should also read lines of credit for specialized and local carriers; brokers without trucks, lines of credit for freight brokers.