Competition Intensifies in Factoring Sector as Conditions Weaken in Trucking Market
Rip Watson | Senior Reporter August 29, 2016 1:45 AM, EDT
This story appears in the Aug. 29 print edition of Transport Topics.
Competition is intensifying in the factoring sector as freight markets shift, said a number of executives whose businesses offer fleets upfront invoice payments for a fee.
“The market is more competitive than in 2014 and early 2015,” said David Baker, owner of Apex Capital Corp., based in Fort Worth, Texas. “There’s excess capacity, so it’s tough for everybody right now, especially our clients.”
Todd Ehrlich, managing director at Atlanta-based BAM Worldwide, illustrated the effects of lower fuel prices and weaker freight rates, highlighting points also made by others: “Fuel affected factoring portfolios by a decrease of over 10% in many cases, and then the softening freight market caused an even bigger shrink,” he told Transport Topics.
“It took a few months to kick in,” Ehrlich added. “The reality of the cash positions of these businesses became challenging quickly. Usually when a business comes to us, they are in a slight to rapid decline because their cash flow is pinched.”
Also speaking of a competitive environment, Love’s Travel Stops & Country Stores official Gary Morgan said that “there is less freight, and the squeeze on margins has been pretty tough for fleets.”
“We see our clients having more difficulty than a year ago,” said Wood Kaufman, CEO of TBS Factoring Service in Oklahoma City, who also called the market competitive. “Most carriers have very little pricing power,” increasing their need to factor to maintain cash flow.
Tom Donohue Jr., founder of Adelphi Capital and an investor in Utah-based Express Freight Finance, said that while invoice amounts have fallen, the number of invoices continues to be steady.
At Marquette Transportation Finance, based in Bloomington, Minnesota, average freight bills have fallen nearly 20%, CEO Rich Voreis said. However, “the market for us is still good,” with a 6.8% rise in invoiced revenue this year and 5.9% more loads.
He also said that fleets are being judicious now in capital spending, which affects the use of Marquette services that function like a line of credit. Although Marquette customers that typically run 100 trucks or more are cautious, factoring is still strong among owner-operators and those with fewer than 20 trucks.
Ronny Pike, sales manager for Seven Oaks Capital Associates in Baton Rouge, Louisiana, also stressed the market effects.
“The [invoice dollar] numbers don’t look as good as they could, but we are doing just as much work,” Pike said, noting truckers come to Seven Oaks because they are just getting started “and looking to grow a little bit, and they may not have enough cash flow to cover that,” he said as shipper or brokers stretch out their payment terms.
Factoring companies also face growing competition within their business.
Kaufman said an influx of new entrants are seeking to capitalize on higher returns in factoring amid low interest rates that limit opportunities elsewhere.
The executives suggested factoring rates, and returns for investors, are in the 3-5% range.
Apex’s Baker told TT the weaker freight market “has caused some of our competitors to be more aggressive on their pricing. You would think there would be more deals because things are tougher and tighter, but instead, what we’re seeing is more trucking companies going out of business.”
Rick Erickson, global director of freight payment at Minneapolis- based U.S. Bank, said his company’s trade finance product is a factoring alternative, providing cash payments to carriers in two to four business days, paying full invoice amounts instead of only partial payment. Costs typically are lower, Erickson said, often 2% or less than factors, because of the bank’s financial relationships with shippers and cost-saving steps such as automation.
Express Freight targets small fleets that previously used local loan officers, who have become more scarce as banks consolidate, bringing expertise in trucking that new factoring businesses don’t have.
Express Freight’s investors include Rob Estes Jr., CEO of Estes Express, which ranks No. 14 on the Transport Topics Top 100 list of the largest U.S. and Canadian for-hire carriers.
That approach “puts us in touch with the entrepreneurial spirit of truckers,” said Donohue. Factors try to differentiate their services in other ways, with one common theme.
“We’re always trying to bring innovative solutions to complex problems in a way that works for our clients,” Baker said, making a point all interviewed companies stressed.
Morgan, of Love’s Travel Stops & Country Stores, said the company began factoring two years ago in response to customer requests, seeing an opportunity to bundle that service with fuel discounts, fuel cards and other services in a way that financial companies cannot.
TBS broadened offerings to include operating authority, Department of Transportation compliance and related services to appeal to carriers that are thinking about how to run their business more efficiently “and are looking for more of a partner to lower their costs,” Kaufman said.