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We are hearing that a number of mid size freight brokers are in financial trouble.
These firms grew using receivables funding to fuel growth and due to collapsing market fundamentals have breached their covenants.
The banks that financed these ABL lines have been trying to play matchmaker for some of these brokers, but their patience is starting to wear thin.
Unfortunately, it will get worse.
The most brutal part of the cycle for a freight broker isn’t a soft market.
It’s when the freight market starts to turn up and spot rates improve, while contract rates remain pressured. This squeezes brokerage margins.
In other words, the spread between spot and contract narrows. When that happens, it hurts the take rate for freight brokers.
A large percentage of contract rates get established during bid season. If conditions are soft at the time of bids, contract rates will fall.
Bid season starts in mid October and ends in February.
Freight conditions are very soft this year, just as bid season gets underway.
This will have a significant drag on contract rates this bid season. In other words, contract rates will drop further as carriers realize it’s lower for longer.
Spot rates, currently at levels where carriers lose money on many miles they run, are unlikely to fall much further.
This will compress brokerage margins, exacerbating any financial struggles that brokerage firms may have.
I would expect we will see some frantic deals in freight brokerage happen over next few months, as healthier players take out the weaker ones.
I also expect some large bankruptcies for those firms that are under significant financial stress.
Bankruptcies are common in trucking, but it’s usually asset based carriers that go under.
This cycle could be the first time we see a number of large bankruptcies hit the brokerage market.
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