How to Protect Your Trucking Client from Restrictive Bank Covenants

How to Protect Your Trucking Client from Restrictive Bank Covenants

Alma Bailey 0 Comments

Accountants, financial managers, and CFOs are facing abnormally difficult conditions to keep their trucking business clients and employers financially stable. Following almost two years of high freight volumes, 2019 was a year of extreme contraction with over capacity, low volumes and volatile rates. This is not a new challenge, but current industry conditions have greatly magnified the situation. The challenge is twofold; keep the business solvent, and maintain debt covenants to preserve financial backing.

What are the Dangers of Bank Covenants?

Financial covenants (a.k.a. loan covenants) define the conditions in a commercial loan that requires the borrower to fulfill certain terms or which forbids certain actions. These conditions always favor the bank at the detriment of the trucking company. First, they restrict the ability to grow the business by limiting your borrowing capacity, but more importantly, they provide the means for a bank to withdraw from the loan agreement if not maintained. The problem is dramatically increased by the fact that most borrowers forget about covenants the minute the loan agreement is signed. Often a covenant is broken (tripped) without the borrower being aware the condition even exists. A banker will use a broken covenant to exit any loan agreement that threatens the profitability of his lending portfolio. In today’s market, bankers are watching trucking companies very closely for this reason.

How to Strengthen a Company’s Financial Position

If a trucking business is dependent on bank financing, it is advisable to re-examine the company’s financial strategy. Commercial banking systems are risk averse by nature. The current state of the trucking industry has banks extremely nervous and unwilling to cooperate with struggling transportation clients. If the bank sees a deteriorating situation with a poor performing trucking client, it will act quickly to withdraw the loan. Become very familiar with the bank covenants attached to the company’s commercial loan agreement and ensure compliance. These are the instruments of control that banks use to govern eligibility for continued funding. Then, research alternative forms of lending, such as Factoring Line of Credit. The goal is to migrate your client to an alternative form of lending that strengthens the company’s financial position, not leave it vulnerable to external decision-makers.

What are the Typical Bank Covenants Trucking Companies Violate?

There are three most common covenants that banks monitor to track the health of their trucking clients:

  • Total debt to tangible net worth ratio

    • Total Liabilities ÷ (Shareholders’ Equity - Intangible Assets)

    • Acceptable ratio: 3 to 1 (or lower)

  • Debt Service Coverage Ratio

    • Net Operating Income ÷ Total Debt Service

    • Acceptable ratio: 1.25 to 1 (or higher)

  • Current Ratio

    • Current Assets ÷ Current Liabilities

    • Acceptable ratio: 1 to 1 (or higher)

Numerous other covenants may be included in a bank loan agreement. Tripping any covenant is grounds for the bank to take one of three actions: send the company to special loans, force the trucking business to sign a forbearance agreement or deliver a notice of foreclosure. Any one of these actions will send the company into a financial crisis that the accountant or financial manager must deal with immediately and effectively, otherwise the trucking company faces imminent financial ruin.

How to Protect Your Client from Restrictive Bank Covenants

The best approach is to be proactive and ensure your client seeks a lender who understands the trucking industry. If the trucking company is not yet committed to a bank, steer clear and advise them to go with a lender who is focused on supporting their success. If the company is already with a bank, line up an alternative provider and keep them in mind should your client trip a covenant. Otherwise, wait until the current bank loan comes up for renewal and encourage them to make the switch then.

What to Do if the Bank Forecloses on the Loan?

The clock starts the moment your client receives notice of foreclosure. Often there are less than than 10 days to secure new funding and pay off the loan in its entirety. In this situation, contact Accutrac Capital immediately! We will assess the situation, propose a solution like Factoring Line of Credit with flexible terms to match your client’s needs and/or make the necessary arrangements to buy out the commercial loan.

What is Factoring Line of Credit?

Factoring Line of Credit is the ideal fusion of a commercial line of credit with freight factoring. It is not a loan; it is the selling of accounts receivable invoices to build a cash reserve from which your clients are able to draw from. In similar fashion to a commercial line of credit, it provides access to these funds as needed with fees to be paid on amounts drawn plus a small administration fee. Unlike a business loan, fees are only paid on funds drawn and not the whole line.

Factoring Line of Credit was first introduced in 2008 during the credit crisis to provide trucking companies a cost-effective alternative to bank financing. No covenants are attached, no reporting is required and no banker is breathing down anyone’s neck ready to pull funding at the first sign of problems. The more invoices the company issues to credit worthy customers, the more funding becomes immediately available. This unique factoring product is easy to qualify for, provides fast access to working capital and removes the danger of the bank losing confidence and suddenly pulling your source of funding.

These are certainly tough times for the transportation industry; make sure the trucking company you serve has the financial stability to ride through the storm. Accutrac Capital provides the financial resources and dedicated services to maintain healthy cash flow. All your trucking client needs are a viable business approach, credit worthy customers and a determination to succeed.

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