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Transport & interest rates 7 min read

Rising interest rates drives transport sector to shift focus

While the pandemic proved primetime for companies that move goods, today’s economy emphasizes liquidity.

When the COVID-19 pandemic shocked Canada’s economy in early 2020, the impact was not just severe, but widespread.

Lockdowns, quarantines and other restrictions caused disruptions in day-to-day routines and in supply chains, adversely affecting nearly every business. In the months that followed, as the global economy reset to the pandemic environment, many business owners continued to struggle. Yet others thrived – and among them were those in the transportation sector. Surging e-commerce demand from housebound consumers, fueled by income support from government, put a premium on durable goods and on companies that transport them. So did continuing supply chain bottlenecks and a deficit in freight capacity.

Not surprisingly, transportation prices soared. In the two years since March 2020, ocean shipping prices rose by about 600%, according to the Federal Reserve Bank of St. Louis; air freight rose by 50%. “Within Canada, too, freight rates have gone up sharply,” says Arjun Uppal, a Mississauga-based business development manager in CWB’s Equipment Financing Group, who specializes in supporting transportation sector clients. “For example, rates between Toronto and Montreal have gone up as much as two to three times, depending on what is being shipped.”

By and large, that has been good news for transportation companies, for whom higher prices translated into dramatically higher revenues and ultra-low pandemic-era interest rates made business expansion and the capital expenditures it required very affordable.

 

A rise in interest, a change in direction

Now, however, the landscape is shifting rapidly. Interest rates are on the rise, raising the cost of borrowing and undermining companies’ ability to expand or buy new equipment. And the spectre of a slowing economy – or perhaps even a recession – is creating uncertainty around whether the favourable freight rates of the past two years will continue.


“Business owners are realizing that attractive rate scenarios are a thing of the past, at least for now,” says Ani Modi, a CWB commercial business development manager based in Ajax, Ont. “People are quickly recalibrating, and some are taking a wait-and-see approach when it comes to further expansion.”

That is a quick about-face for the transportation sector. Over the previous two years, increased demand and higher prices boosted the bottom lines of sector incumbents and attracted new entrants; it also created new business opportunities for smaller operators, as even large retailers and distributors expanded and reinforced their supply chains. To take advantage, transportation companies needed to buy equipment, and historically low interest rates made such capital expenditures easier.

“Companies stepped on the accelerator and purchased not just new equipment, but also new yards and office space,” notes Uppal. “Low rates made purchases like that affordable, without straining cash flows.”

Today, the Bank of Canada appears to be on a trajectory to continue raising rates, and economic sentiment has turned negative. Revenues remain high, but transportation business owners, Uppal says, simply cannot be sure that the elevated freight rates of the past two years will continue for the next few years, months or even weeks. Inflation in fuel and labour is adding even more volatility to the business outlook, and higher borrowing costs are making further expansion more difficult.

Meanwhile, Uppal says that many clients are reporting that their collection periods are getting longer – customers are not paying as promptly as they used to. Faced with an uncertain future, transportation companies are increasingly playing defence. “Nobody wants to speak the dreaded R-word,” Modi adds, “but there is a sense that people want to focus on their core business and look for solutions to ride out what could be a rough ride going forward.”

The good news is that many companies will be doing so from a position of financial strength. Uppal points out that his transportation clients funded pandemic-era expansion by borrowing at longer-term fixed rates, insulating them from rate shocks in the medium term. He also points out that equipment prices in transportation have inflated by “at least 20% to 50%,” meaning used equipment has maintained its value.

“Somebody who bought a new trailer in 2020, for instance, could still sell it at the same price they bought it for,” Uppal explains. “That capex from two years ago is really helping them now.”

 

Recalibrating for success with a financial partner built for business 

Especially in today’s environment. One of the benefits CWB clients realize is the creativity and flexibility that comes from working with a team that is dedicated to business owners. For example, many companies are looking for ways to improve their cash positions to help them navigate a potential downturn. For some, that means working with CWB to unlock the equity they have built up in their equipment. For others, CWB’s flexible financing solutions can help business owners ride out short-term cash-flow challenges if customers are taking longer to pay, or extend amortization periods to improve cash flow.


“One transportation customer came to us looking for liquidity not to do more capex, but to prepare for the worst-case scenario and better handle whatever lies ahead,” says Uppal. “We helped them unlock the equity in the equipment and other acquisitions they made a couple of years back by giving them a new facility and extending their amortization.”

That is an example, Modi and Uppal emphasize, of how vital it is for business owners to deal with a financial institution that understands their challenges and truly works to support their needs and their businesses.

 

“There are not many institutions who understand business owners as thoroughly as we do,” says Modi. “We can be creative with our solutions and be quite a bit more flexible” – which is especially needed in a challenging interest rate environment.


“In every meeting we have with clients, we keep an open mind and try to help them address whatever challenges they think they might encounter,” Uppal adds. “When things are uncertain, it’s the best time for business owners to work with people who are not just their bankers, but also their coaches and, at the end of the day, their friends.”