UK haulage firms struggle under rising costs and declining revenues

Independent haulage companies are feeling the squeeze as elevated operating costs and declining revenues are eroding already thin margins. A plethora of factors are contributing to rising operating costs, including higher debt servicing costs due to the elevated interest rate environment, high fuel prices, wage growth pressures, as well as consumer and regulatory pressure to invest in technology and sustainability metrics. At the same time, intense competition, the impact of Brexit border controls, and waning consumer spending have reduced productivity, trading volumes and, consequently, revenues.

This perfect storm has overburdened haulage firms which have yet to repair their balance sheets from legacy debt piles accumulated during the pandemic. A tipping point is near for many, which has significant implications for directors, shareholders and haulage company funders, including invoice discount funders who must scrutinise borrowers’ balance sheets as the outlook for revenues deteriorates.

Road haulage is a vital cog of the UK economy and supply chains, responsible for the transportation, loading, tracking and delivery of goods across the retail, hospitality and construction industries. The road haulage industry – comprised of more than 60,000 businesses across the UK and estimated to contribute £13.5bn to the economy – operates on slim margins and is sensitive to fluctuating customer demand and rising fuel prices.

Rate cuts unlikely to help soon enough

Over the past two years, the Bank of England’s (BoE) monetary tightening cycle has hit haulage firms particularly hard. Most independent haulage firms finance their fleets on hire purchase (HP) agreements, which have become more expensive over time. While inflation has started to come down near to the BoE’s 2% target, the first rate cuts are still to emerge. Headline CPI inflation fell to 2.3% over the 12 months to April, down from a 3.2% annual figure for the prior month. The drop was significantly impacted by base effects, making likely a lower annual inflation print in April. However, the decline in inflation was still smaller than expected, attributed to stubborn services inflation, and delaying expectations among economists of a first rate cut to August. Even if rate cuts do begin later this summer, BoE officials have signalled that the lag effect for monetary policy to be felt by businesses can take as long as two years to work through. This suggests that monetary policy will not come to the rescue of struggling industries like the haulage sector. On the contrary, as the higher for longer interest rate environment endures, the more likely stress becomes distress. 

Impact on invoice discount funders

Invoice discount funders have traditionally favoured lending to the haulage sector due to its transparent accounting trail. However, as margins continue to come under pressure and trading volumes slow, funders are starting to see increased stress from their haulage clients. Many firms are unable to pass on inflationary pressures to customers, due to intense market competition which forces haulage companies to offer competitive terms to win contracts. This inability to raise prices, combined with rising operating costs, is eroding profits and reducing the creditworthiness of affected haulage firms.

In addition, funders have observed further troubling signs, such as haulage firms struggling to pay subcontractors, meeting HP obligations on their trucks, and requesting time-to-pay arrangements from HMRC. These reveal significant sector strain under the surface.

Paradox of invoice discounting

One of the inherent challenges of invoice discounting is that it works well for growing companies – those raising more invoices and thus receiving more money upfront. However, in a shrinking market, the funding tap is effectively turned off when it is most needed. As trading volumes decline, haulage firms raise fewer invoices, limiting the amount they can draw down, while their operational costs remain high. This creates a perfect storm where firms struggle to maintain cash flow, putting them at risk of insolvency.

Funders have anecdotally reported increasing requests from haulage clients for higher advance rates on their invoices – from the typical 70% to as high as 80–85% – to cover operating costs while trading volumes have declined. However, this goes against the funders’ risk models, as higher lending percentages increase risk exposure just when haulage firms’ revenues are declining.

Proactive measures for funders and haulage firms

Funders need to act early to mitigate these risks. Proactively engaging with clients to understand their financial position and discuss potential solutions can prevent a cash flow crunch. Independent assessments of a client’s financial sustainability amid a trading slowdown can provide insights into the probable duration of market weakness and available options for cost-cutting and cash raising.

For haulage firms, strategic measures might include reducing workforce size, downsizing property leases, and renegotiating terms with suppliers and landlords to reduce ongoing costs. Selling non-essential company assets or considering sale and leaseback arrangements can also help bridge short-term financial gaps. Funders and haulage firms must work together to explore all possible avenues, including seeking new equity investment or restructuring existing debt. In some cases, formal restructuring like Company Voluntary Arrangements (CVAs) or administration might be necessary to protect the business’s future.

Conclusion

The current economic environment presents significant challenges for the haulage sector. Invoice discount funders must stay vigilant, engaging with clients early and frequently to understand their financial position and adapt lending strategies accordingly. Proactive engagement by funders and strategic financial management by haulage firms are essential to mitigate risks and ensure long-term stability. Funders must remain agile and ready to adjust their approach in response to evolving market conditions and emerging client difficulties.