Q&A: Pricing loads when fuel costs more than $1 a mile

Are you seeing small motor carriers prioritize different types of loads given the current state of diesel?

I would say so. A full tank gets you 1,800 miles—at $6.50 a gallon, that costs roughly $2,000. That’s $1.11 per mile in fuel alone, when last year the cost per mile in fuel was closer to $0.60. When you factor in operating costs, too, it creates a sizable price floor for carriers looking for their next load. On top of that, a carrier is also limited to the funds they have access to when they’re at the pump. So if they have $1,200 on hand, they’re not picking up that cross-country trip that might be a higher dollar per mile because they just wouldn’t make it.

What’s the danger in a carrier selecting a load that pays quickly versus one that is profitable but pays more slowly?

Plenty of carriers from this past freight recession know the margin erosion problem all too well. If you have a factoring company and factor every load, you bake in the cost of funds into every invoice and you can go get the most margin-accretive load. If you don’t have a factoring company, you need to be mindful of your cash on hand.

High margins are great, but less so if they mean taking credit risk on a broker you don’t know without a factor of their own or draining your account. The risk of taking the slower-paying load is that you’re floating your own accounts receivable, and may need it for a repair or another hiccup. The risk of the QuickPay load is that you’re now in a cash catch-up cycle, looking for another load with more margin next time to make your truck payment.

Are there things that small trucking businesses can do to maintain cash flow while they're waiting for payments to come in?

Absolutely. Factoring and QuickPay are probably the most obvious ones. Instead of waiting 15 or 30 days, you can get paid in less than a day, either directly by the broker or by a factoring company. There are also fuel advances if you need money for diesel before delivering a load.

The tradeoff is that none of that money is free. Fuel advances in particular can get pretty expensive: You might have to pay $50 off the top for $750 in fuel, if it is even made available to you. So I think the important thing is understanding what every advanced payment option would cost you. If you can afford to keep driving without it, great. But if you can’t, there are different ways to pull that cash forward, some more painful than others.

We've already seen capacity tighten in recent months; do you foresee an even greater tightening of capacity in the near future?

I think it’s possible, but I’m not betting on it. We’ve gone through a very long freight recession, and the capacity is quite low already. If the market tightens, it’ll need to come from the demand side of the equation. The trucking market will need to see more imports, more production and more purchasing from the consumer in order to meaningfully increase demand for trucking.

It’s a difficult market for carriers. Increases in fuel and insurance are driving costs to operate to new all-time highs, which makes entering the market as a new carrier scary. I’m hoping for some increased demand for the carriers who have lasted through this trough, so they can be rewarded on the other side.

If you were to offer one piece of advice to small motor carriers operating in this current environment, what would you say to them?

Make sure you know each load's true cost per mile, plus what it'll cost to keep your truck moving between when you drop the load off and when the invoice is paid. Add up fuel, tolls, driver pay and all the other expenses that come with a load, then use that number to price and pick loads. It also helps to keep a cash buffer on hand, since costs can jump fast without warning, like the recent fuel spike.

Beyond that, look for ways to take some pressure off. Fuel discounts and fuel cards, better payment terms, and tools to speed up payment, like factoring, can all give you a little breathing room and help you build up your buffer. Just make sure to include any fees in your cost per mile so you're comparing loads on what they actually cost.