Summary
- Trucking: The post-COVID environment saw a surge in demand for smaller trucking companies, leading to increased MCA applications. However, as fuel prices rose and larger delivery companies flooded the market, the sector’s fortunes began to dwindle, affecting payment capabilities and delinquency rates.
- Yellow Corp. Closure: The recent closure of Yellow Corp., a major player in the Trucking/Logistics space, has significant potential impacts. The void left by Yellow’s closure may lead to higher prices for trucking services and could make it more challenging for a portion of their client base to access the services they need. It also highlights the competitive and challenging nature of the Trucking/Logistics industry, where margins can be thin, making it crucial for companies to be prepared for financial setbacks.
- As a result of Yellow Corp’s closure, independent, regional Trucking companies will likely receive a boost in business from clients formally serviced by Yellow that are too small to have their needs covered by another large Trucking conglomerate.
- These smaller, independent Trucking/Logistics companies would need to tap into the MCA financing space to accrue more trucks, and drivers and cover fuel costs in order to bid on now-open contracts previously serviced by Yellow Corp. While the direct impact is not clear at the moment, with the sizeable void created in the Trucking industry by Yellow Corp’s closure, a portion of their client base will be seeking out alternative logistical options, and smaller trucking companies will almost always require MCA style financing to pick up these larger contracts.
The merchant cash advance (MCA) industry, known for its diverse range of financing options, has experienced significant shifts in various sectors since the COVID-19 pandemic. Among these, the trucking sector emerged as an unexpected player, witnessing a surge in demand as consumers increasingly relied on deliveries amid supply chain challenges. This led to an influx of MCA applications from smaller trucking businesses seeking capital to expand and meet the rising demand.
Simultaneously, MCA funders, hungry for business after a challenging year, found a pool of applicants eager to accept their advance terms. However, as fuel prices rose and larger delivery companies flooded the market, the trucking sector’s fortunes began to dwindle in the latter half of 2021, affecting payment capabilities and increasing delinquency rates.
We delve into the intricacies of this diverse asset class within the MCA industry, analyzing its varying performances in a post-pandemic economic landscape, and highlighting specific companies potentially affected.
Trucking/Logistics
Historically a non-preferred SIC code in the MCA industry, the post-COVID environment presented small to mid-sized companies with a massive uptick in demand for their services as consumers relied more on delivery, and lingering supply chain issues continued to affect the overall retail marketplace. What resulted was an influx in MCA applications from smaller trucking businesses to hire drivers, repair vehicles, and purchase fuel to win contract bids on the expanding pool of available jobs. For an industry sector with traditionally few options for supplemental financing, they were willing to accept high-priced approval terms to gain access to capital in order to take advantage of the peak demand for their services. Likewise, higher-risk MCA Funders starved for business and low on revenue after pausing funding for the majority of 2020 (and simultaneously suffering losses from outstanding advances paused or defaulted as a result of COVID restrictions), saw a pool of applicants ready and willing to accept their advance terms, in an economic climate poised to keep their revenues strong.
Through the first half of 2021, these corresponding economic factors fueled approval rates and performance for MCA funding into the Trucking sector, but that began to wane towards the 2nd half of the year as fuel prices started to rise and larger companies in the delivery space (ie Amazon) began to flood the marketplace. Increasing costs and drop-off in consistent job opportunities left smaller businesses in the trucking space with thinner margins and less work, making it more difficult to pay drivers competitively and maintain their fleets. This fallout made it increasingly more difficult for those with existing MCA obligations to regularly make payments and eventually became delinquent. Across the Funding space, many groups tightened up on approval requirements for the Trucking industry if not restricting them altogether. The current state in the MCA demonstrates appetite only for” bankable” businesses, with minimum monthly revenue in the low 6 figures, a fleet of 10 trucks or more and established for multiple years, carrying sub-contracts with larger carriers and logistics companies (UPS, DHL, FedEx, etc).
A Current Example
On Monday, July 31st, Yellow Corp. (YELL), announced it would be shutting down. But what happened?
- Yellow Corp., a 99-year-old trucking company, has shut down and laid off all 30,000 of its workers.
- The company had been in a battle with the Teamsters union, which represents about 22,000 drivers and dock workers at the company.
- The union had threatened to strike last month but canceled the strike after the company agreed to make the required payments to its pension and health insurance plans.
- However, the company was unable to make those payments, and it shut down operations on Sunday.
The potential impact of Yellow Corp.’s closure on the MCA space is significant. Yellow was a major player in the MCA space, and its closure will leave a void that will be difficult to fill. This could lead to higher prices for MCA services, and it could also make it more difficult for businesses to get the MCA services they need.
In addition, Yellow Corp.’s closure is a reminder of the challenges facing the MCA space. The MCA space is highly competitive, and margins are often thin. This makes it difficult for companies to survive financial setbacks, such as the one that Yellow Corp. experienced.
The closure of Yellow Corp. is a setback for the MCA space, but it is not a death knell. The MCA space is still a growing market, and there are many other companies that are providing MCA services. However, the closure of Yellow Corp. is a reminder that the MCA space is a challenging one and that companies need to be prepared for financial setbacks.
Conclusion
The merchant cash advance (MCA) industry has undergone significant changes in various sectors since the COVID-19 pandemic, with the trucking sector standing out as an unexpected player due to increased demand for delivery services. While this led to a surge in MCA applications from smaller trucking businesses seeking capital, fuel price rises and competition from larger delivery companies later impacted the sector’s performance. The closure of Yellow Corp., serves as a poignant reminder of the industry’s challenges, as companies must navigate a competitive landscape with thin margins. Although Yellow Corp.’s closure may leave a void, the MCA space remains a growing market with the potential for resilience and continued growth, emphasizing the importance of preparedness for financial setbacks in this dynamic industry.
