This calls for very careful and prudent credit policies, to avoid losses when clients become bankrupt.
The industry operated profitably from 1985 to 1988, but a considerable recession that hit the economy in 1989 caused instability. As a result, the trucking companies lost revenues as manufacturers were reducing their transportation requirements as they cut down their operations. In fact, most of the trucking companies became bankrupt and the few that survived the situation lowered their prices to remain competitive. Although the industry recovered from the recession in 1990s, the transportation industry in southern Ontario remained challenging as there were too many companies competing for few clients. By 2003, albeit the industry experiencing substantial growth, the profit margins remained very low since the prices were still very low.
To survive with very low prices, the companies are forced to look for loans so they can operate at high volumes to increase their profits. Besides, the trucking companies maximize the time they spend on the road to increase sales so they can be able to repay the loans and their operating expenses.
The Ministry of Transportation of Ontario (MTO) had introduced legislation that required all vehicles used by trucking companies to comply with strict safety standards. The ministry impounded any vehicle that failed to comply with these safety measures.
Commercial Equipment Financing (CEF) carefully analyses its borrowers before approving loans, with the aim of increasing the recovery rate. This is particularly very important because the industry is undergoing very tough economic conditions and the chance of a company failing to repay the loan is very high. What CEF looks for can be summarized in terms of ‘4 C’s of Credit’ as analyzed below.
The financial History of the borrower is referred to as