Transportation Factoring Will Require Creative Evolution to Prosper in 2023

In the second piece of a two-part interview, Tim Valdez, president of the factoring division at Triumph, discusses how 2023 will force transportation factors and their clients to be creative and evolve through adopting automation and improving payment processes. Valdez also touches on what a recession will mean for transportation factoring while sharing his overall outlook for the industry. Read part one of this interview series here.

Why is it important for the trucking industry and its various participants (carriers, factors, etc.) to adopt automation?

Tim Valdez: Automation is really important for trucking to evolve as an industry and to run more efficiently. If we look at transportation, even dial it back 10 years ago, there wasn't a lot of technology in trucks. Everything was paper driven or manual when it came to what a driver or a carrier had to navigate, but then electronic logging devices (ELDs) started to be integrated. Some had apprehension when the mandate came out a few years ago, however, as they've been implemented, I like the ELD concept better because we have better visibility on where a truck is. This has implications as it relates to mitigating fraud and the speed at which we hope to fund.  

From a funding perspective, I look at automation as a tool that helps make life more difficult for fraudsters. As an example, TriumphPay, has integrations with a variety of brokers that will track information, the carrier's load and payment information from acceptance to delivery.

As a factoring company, you want to buy the most legitimate paperwork and legitimate loads, and you want to do it quickly and as efficiently as possible. Many transportation factors fund the same day, and technology like ELDs and API integrations will benefit factors in verifying and validating loads that help eliminate double brokering and fraudulent invoices while creating efficiency for carriers and quicker access to capital for drivers. That's the direction that automation is going to take in the transportation factoring business.

It's fair to say that transportation has lagged other industries in terms of payment terms and methods. With automation and other AI-driven tech, the goal is to leverage the available data to empower our teams and clients, and to provide a better overall funding experience for both.

At Triumph, we spent the last two years focusing on building out our own in-house product and dev teams. On the factoring side alone, we now have a Chief Product Officer, a head of design, and product teams that are focused on specific advancements to make our client experience better.

What advances have been made in the area of payment within the trucking industry in the last few years? What evolutions do you expect in the coming years?

Valdez: In the past, there were some third-party payers that were doing freight bill auditing and payment, and they were ultimately screening documents for their customers and then paying on behalf of their customers. The design and the companies doing that did not evolve. They were very manual-based.

Payments today have evolved to the point where there is much more integration between brokers, third-party payment networks and factoring companies. For example, because of all these advancements in technology and the transfer of information between participants, there is an opportunity to create products such as 24/7 funding in addition to providing analytics to help support and provide information to carriers in order to make them more efficient.

Looking more at payment methods, traditionally, funding to carriers is limited to ACH checks or wires. I think there are other opportunities in the future where a variety of platforms can be used to provide liquidity outside of business hours, allowing constituents to be less reliant on Fed-backed solutions. This combination of different platforms and payment methods will drive the business into the next generation.

As consumers, we are all increasingly aware of digital wallets, and how they have completely changed the payment experience in retail. I imagine that in the near future we will see something similar in transportation where different funding methods will be available – debit, fuel card, etc. – that can be used for business expenses.  

What would a recession mean for the trucking industry and how can factors help their clients in the sector?

Valdez: I’ve been through several economic cycles in my career. I don't know that I'll go as far as say we are in a recession yet, but there are signs that we will be.

As a financial partner to thousands of companies, we are sensitive to the impact that the downturn has had on many in the transportation sector. Unfortunately, during these times, it’s usually the smaller carriers who struggle the most to maintain operations. We saw historic trends in terms of those carriers exiting the industry.

But for a factoring company, these downturns also mean that banks may be looking to limit their exposure on credit lines or asset-based lending facilities. This gives factors the opportunity to upgrade their portfolios because there may be clients they would never get a chance to work with because the client’s financial situation is strong. If we go into recession, freight rates go down, leverage goes up, and certain clients fall out of favor based on certain covenants within their ABL facility and/or bank line, yet they still have to find a solution. For a factoring company, these can be some of the most efficient and carriers that can upgrade their portfolio.

Ultimately, there's the good and the bad. The good is that the factoring community can thrive. The bad is that it can thrive because someone else has fallen out of favor with their current lender, but a recession does create opportunities within the factoring space.

Will factoring be a more or less attractive source of funding for trucking companies in 2023/during a recession?

Valdez: I think factors give more flexibility for carriers going through financial struggles. When we look at what the core business of factoring is, we advance funds based on the quality of their debtors. If the debtor quality is there, we can provide a higher percentage or a higher level of liquidity to a carrier when they need it most. We're less worried about leverage.

If you have a client who had balance sheet constraints or working capital  challenges on their P & L, we can look past that and ask, "Did they forget how to truck? Did they forget how to go from point A to point B efficiently and effectively?" The answer to those questions is typically ‘no’. Then we ask, "Are they doing business with credit quality account debtors?” The answer to that is typically ‘yes’.

Even though we're currently experiencing and will continue to have some choppiness in the first half of 2023, I'm very optimistic on the direction of factoring, and what factoring could do to provide liquidity in the transportation space this year.

What is your overall outlook for the transportation factoring space in 2023?

Valdez: The small factors that have focused on small carriers will continue to have challenges in 2023. In addition, factors that are borrowing money from banks or other sources will struggle a little bit more to be competitive. There will be an evolution in creativity in how deals are constructed, along with adding other bundled products to help enhance factoring offer. The process of being more creative is going to be much more apparent in 2023 as people try and navigate these markets. If you don't evolve, then you should look at consolidating with someone that can. I think that's ultimately the opportunity for a small factor: evolve and get more efficient and more automated or find a partner that is and join forces with them.

We have seen the creativity where factors utilized fuel discounts or insurance to entice or to prop up their customers. I think you'll see more of that. You'll see fewer factors focused 100% on factoring. They're going to have to come up with other ways to help generate income. I think you'll see the smaller factors adapt, and today there are more technology resources for small factors that they didn’t have in the past that will benefit them.

Bank-owned factors are probably in the best position for 2023 because cost of capital has gone up but not as much as it has for non-bank owned factors. Technology has also evolved very quickly, and those factors that are bank-owned have the ability to invest in technology and invest in new product offerings.

One last topic to circle back on is fuel, which is a major cost to carriers in general. When fuel prices are normal, the average expense is somewhere between 18% to 20%, or 18 to 20 cents on every dollar that a carrier spends. In the last year, the margin at retail have been so large, with some retailers making a dollar a gallon. The small carrier that's getting that 15-cent discount is at a huge disadvantage in comparison to the larger carrier that has a cost plus or some other creative deal structure. So, I think fuel is going to continue to be a driver, and I think it's going to be critical to see how energy in general evolves for the transportation space in 2023 and beyond.

Ultimately, this should be a year that factoring companies look to themselves to create value for their clients, either through their own expanded product offer or through industry partnerships that pass on savings or efficiencies. We’ve seen that on our side. We support many clients with our factoring, insurance, fuel and banking products. We’ve been able to take a broader view of a business and take into various product enhancements that a traditional bank, , may not be able to.