The trucking industry has always been cyclical, but recent years have brought unprecedented challenges. The post-COVID era saw a perfect storm that led to extreme swings in freight demand, forcing many trucking companies to close their doors. The situation has only worsened as trucking rates have plummeted back to pre-COVID levels, leaving companies with inflated costs and debt burdens.

The current landscape

The trucking industry’s boom during the height of the pandemic was unsustainable. High demand led to a surge in new trucking companies and inflated prices for trucks and equipment. However, by mid-2022, as trucking rates normalized and costs remained high, many companies found themselves overleveraged and struggling to survive. Larger fleets, especially those with 10 or more trucks, now face the greatest risk of bankruptcy as they grapple with declining revenues and mounting expenses.

Preparing for bankruptcy

For trucking companies on the brink of bankruptcy, preparation is key. Start by creating a detailed profit and loss statement that identifies the sources of your negative cash flow. Understanding where your money is going is crucial for making informed decisions about restructuring. Developing a reorganization plan with a “what-if” scenario spreadsheet can help you model different outcomes and plan effectively.

Transparency is critical. Identify any personal expenses that have been charged to the business. These need to be removed from the company’s finances, as they will not be allowed in a reorganization plan. Acting quickly is essential. Delaying the decision to file for Chapter 11 can lead to further deterioration of the company’s financial situation, making recovery more difficult.

Legal fees and attorney selection

When filing for Chapter 11, legal fees can be substantial, typically ranging from, but not limited to, $35,000 to $50,000 for a small fleet. It is important to select an attorney who is well versed in factoring agreements, as that knowledge will be crucial in navigating the complexities of the bankruptcy process. A factoring company, which provides debtor-in-possession (DIP) financing, will also require legal representation to ensure that payments on receivables are protected during the bankruptcy proceedings.

Treatment of creditors and vendors

In Chapter 11 bankruptcy, trucking companies aim to reorganize their debts while continuing operations. Understanding the treatment of creditors and vendors is critical:

• DIP status: The trucking company typically remains in control of its assets and operations during the bankruptcy process.

• First-day motions: These motions allow the company to continue certain operations and pay critical vendors and employees to stabilize the business. It is important to get a “stay” order quickly to maintain operations and continue factoring receivables. The factoring company needs to obtain a super priority lien to begin factoring.

• Critical vendors: These are vendors essential to the business’s operations. For non-asset-based trucking companies, it’s vital to classify leased-on truck drivers as critical vendors to ensure they are paid for any pre-petition payables.

• Secured creditors: These creditors have a legal claim to specific assets and are prioritized for repayment. Equipment lenders, in particular, often collaborate with the reorganization plan to ensure the company’s successful turnaround.

• Unsecured creditors: These creditors lack collateral backing their claims and are usually paid after secured creditors, often receiving less than the full amount owed.

The reorganization plan must outline how the company intends to restructure its debts and operations. This plan requires approval from both creditors and the court. Once confirmed, the company implements the plan, making payments as outlined and continuing operations.

The role of factoring companies

Factoring companies play a crucial role in providing DIP financing during Chapter 11 bankruptcy. They can continue funding a trucking company by purchasing receivables, even when a company is under bankruptcy protection. If a factoring company is already in place, the transition to DIP factoring is straightforward once court approval is obtained. It’s important for the factor to hire legal representation to protect payments and ensure the smooth continuation of operations.

However, some factoring companies may opt out of the Chapter 11 process, choosing to “collect out” instead of dealing with the complexities of a DIP process. This decision can place the trucking company in a difficult position, as it may need to find a new factor quickly. The longer this transition takes, the more harm can be done to the company, including undelivered loads and unpaid drivers.

In such cases, early decision-making and careful planning are crucial. The new factor can either buy out the old factor after the stay order is approved or agree to factor only post-petition receivables. Either approach can work as long as all parties are aligned.

When a bank Is involved

Banks, as primary secured lenders, add another layer of complexity to the bankruptcy process. Due to extensive regulations and scrutiny, banks often propose conservative payment plans that require multiple approvals, leading to delays. However, receivables may still play a critical role in the reorganization plan. A factoring company can step in to purchase new receivables, injecting cash back into the company and aiding in its recovery.

For unsecured lenders, such as merchant cash advance lenders, the reorganization process is less favorable. Without collateral, these lenders are lower on the repayment priority list and often recover little of what they are owed.

Choosing the right factoring partner

1st Commercial Credit and its affiliate companies specialize in providing tailored factoring solutions for trucking companies. Nationwide Commercial Credit Inc., for example, focuses on small to midsize fleets, freight brokers and freight forwarders, offering non-recourse factoring with 100% credit insurance on all receivables.

In today’s volatile economy, it is vital to choose a factoring partner that can offer the financial support and expertise needed to navigate the complexities of Chapter 11 bankruptcy. With the right partner, trucking companies can protect their cash flow, maintain operations and work toward a successful reorganization.

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